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Chapter 4 SM - Chapter 04 Engagement Planning CHAPTER 4...

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Chapter 04 - Engagement Planning CHAPTER 4 Engagement Planning LEARNING OBJECTIVES Review Checkpoints Exercises, Problems and Simulations 1. List and describe the activities that auditors undertake before beginning an engagement. 1, 2, 3, 4 53, 54, 55 2. Identify the procedures and sources of information auditors may use to obtain knowledge of a client’s business and industry. 5, 6, 7, 8, 9 52, 56, 59, 63, 64 3. Perform analytical procedures to identify potential problems. 10, 11, 12, 13, 14, 15 47, 48, 49, 51, 58, 62 4. List and discuss matters of planning that auditors should consider for clients who use computers, and describe how a computer can be used as an audit tool. 16, 17, 18, 19, 20, 21, 22 57, 60, 65 5. Review audit documentation for proper form and content. 23, 24, 25 50, 61 4-1
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Chapter 04 - Engagement Planning SOLUTIONS FOR REVIEW CHECKPOINTS 4.1 Auditors can use the following sources of information to help decide whether to accept a new audit client. Financial information prepared by the prospective client: Annual reports to shareholders Interim financial statements Securities registration statements Annual report on SEC Form 10-K Reports to regulatory agencies Inquiries directed to the prospect’s business associates: Banker Legal counsel Underwriter Other persons, e.g., customers, suppliers Predecessor auditor , if any, communication, re: Integrity of management, Disagreements with management Analysis : Special or unusual risk related to the prospect Need for special skills (e.g., computer or industry expertise) Internal search for relationships that would compromise independence Auditors can search business press articles and stories and legal files on the Lexis-Nexis system or on the Internet for news about chairman of the board, the CEO, the CFO, and oftentimes other high-ranking officers. Auditors can engage an outside search firm (private investigators) to conduct additional searches for information. Auditors are looking for information about client risk factors-- companies accused of fraud, companies under SEC or other regulatory investigation, companies that have changed auditors frequently, and companies showing recent losses. 4.2 Client consent is required because the Code of Professional Conduct prohibits the predecessor audit firm from revealing confidential information to the successor audit firm without the consent. Confidentiality remains even when the auditor-client relationship ends. A successor audit firm should inquire specifically about: Management’s integrity Disagreements the predecessor may have had with management about accounting principles and audit procedures. Communications the predecessor gave the former client about fraud, illegal acts, and internal control recommendations. The predecessor’s understanding about the reasons for the change of auditors (particularly about the predecessor’s termination).
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