Chap002-LN

Chap002-LN - Chapter 02: The Audit Planning Process:...

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Chapter 02: The Audit Planning Process: Understanding the Risk of Material Misstatement CHAPTER 02: The Audit Planning Process: Understanding the Risk of Material Misstatement After studying this chapter, you should be able to: 1. Describe the audit process including its planning, testing, and decision phases. 2. Understand the preconditions for an audit. 3. Explain how the auditor gains an understanding of the entity and its environment, determines materiality, and assesses the risk of material misstatement. 4. Describe how the auditor develops an audit strategy and an audit plan to respond to the assessed risk of material misstatement. 5. Understand how the auditor reduces audit risk to an acceptably low level1. 6. Explain the systems of quality control for accounting firms. Chapter 2: The Audit Planning Process: Understanding the Risk of Material Misstatement Chapter Highlights This chapter provides a detailed overview of the audit planning process from considering the preconditions for the audit to gaining an understanding of the client, determining materiality and utilizing the audit risk model. This chapter introduces the “Did You Know” mini-ethics cases which are found throughout the book about current fraud cases and other relevant events that have had an impact on the professional practice of accounting. The Engagement Letter (Exhibit 2-2) is illustrated; it’s important to become familiar with the format and content of the letter. In Exhibit 2-4, the AICPA’s Worksheet for Calculating Materiality, along with the example of calculating materiality levels for pretax income for the General Mills Inc. provides example of the manner in which materiality is established in audits of financial statements. An Audit Program for Substantive Testing for Accounts Receivable is found in Exhibit 2-5 which lists audit procedures and other necessary information contained in an audit program. Chapter Outline 1. Describe the Audit Process (Slide # 1… see companion slides) GAAS requires that an objective of the audit process is to obtain reasonable assurance about whether the financial statements are free from material misstatements. Reasonable assurance- high level of assurance but not absolute Material misstatement- an error or fraud in the financial statement that might cause an user of them to change his or her decision about the company The Audit Process – Exhibit 2-1 (Slide #2 ) Planning Phase Preconditions for the Audit Understand the Entity and its Environment Determine Materiality Develop an Audit Strategy Testing Phase Decision Phase 2. Consider the Preconditions for an Audit (Slide #3) 2-1
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Chapter 02: The Audit Planning Process: Understanding the Risk of Material Misstatement The auditor determines whether to accept an audit engagement for a new or current client, and to do so, they assess whether the preconditions for an audit are present— Is the financial reporting framework that the client used to prepare the financial
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This note was uploaded on 12/03/2011 for the course HIST 101 taught by Professor M during the Spring '11 term at NJIT.

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Chap002-LN - Chapter 02: The Audit Planning Process:...

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