audit planning

client acceptance

1. evaluation of the client’s integrity

2. predecessor-successor communication

3. determine whether the preconditions of an audit are present

4. reaching a common understanding of the terms

The continuing wave of litigation involving auditors underscores the need for CPA firms to develop quality control policies for thoroughly investigating prospective clients

before accepting an engagement

engagement risk

Auditors consider the reputation of management and the financial strength and credit rating of a prospective client to help assess the overall risk of association with that client

engagement risk is increased when the prospective new client…

• is in a weak financial capital

• greatly in need of additional capital

• goes bankrupt

to obtain an audit, the auditors may be asked to submit a competitive proposal that will include…

• the nature of services that the firm offers

• the qualifications of the firm’s personnel

• anticipated fees

when businesses engage the services of independent public accountants…

they usually ask for an estimate of the costs of the audit

when auditors replace other auditors they should attempt to communicate with the predecessor auditors ___ making a final decision to accept the new engagment

before

inquiries from the successor auditor include asking…

• any disagreements

• any fraud or law violations

• internal control weakness

• why the auditor was replaced

• any risky transactions with related parties

shopping for accounting principles

management tries to find an auditor who will agree with their preferred (and often questionable) accounting treatment

objective of audit planning

is to plan the audit so that the audit is conducted effectively

planning a financial statement audit includes

Establishing the overall audit strategy for the engagement

Developing an audit plan

Understanding the audit client’s business

Assessing the risk of material misstatement

Developing a work program and establishing the timing of the work

Assigning and coordinating staffing requirements.

planning activities

the nature and extent are dependant on the size and complexity of the company

the auditor should evaluate whether the following matters are important to the company’s financial statements and internal control

benefits fo audit planning

improved efficiency

enhanced quality

better communication

increased confidence

cost savings

preliminary engagement activities

Perform procedures regarding the continuance of the client relationship and the specific audit engagement.

Determine compliance with independence and ethics requirements.

Establish an understanding of the terms of the audit engagement with the audit committee in an engagement letter.

engagement letter

written document used to formally establish an understanding between the auditor an the client regarding the terms of the audit

audit strategy

is the overall approach designed by auditors to conduct an audit engagement effectively and efficiently, outlining the scope, timing, and direction of the audit, taking into account the entity's characteristics, industry, and risk level.

audit objectives

Verifying the accuracy of a company's financial statements

Ensuring compliance with accounting standards and relevant laws

Assessing the effectiveness of internal controls

Identifying potential risks of fraud

Providing an independent opinion on the fairness of financial reporting

Confirming the company's financial position to stakeholders like investors and lenders.

audit plan

is developed and documented based on the overall audit strategy. It is more detailed than the audit strategy because it includes the nature, timing, and extent of work to be performed

benefits of audit planning

• sufficient appropriate evidence for the circumstances

• audit costs at a reasonable level

• avoid misunderstandings

• helps know the scope

• carry out the audit more smoothly

understanding the client and its environment

the auditor should obtain a level of knowledge of the entity’s business that will enable them to plan and perform the audit

purpose of obtaining an understanding of the company’s objectives

is to identify business risks that could reasonably be expected to result in matrial misstatement of the financial statements

company performance measures

The purpose of obtaining an understanding of the company's performance measures is to identify performance measures, whether external or internal, that affect the risks of material misstatement

13 accounting principles

• accrual

• conservatism

• consistency

• economic entity

• full disclosure

• going concern

• historical cost

• reliability

• revenue recognition

• matching

• materiality

• monetary unit

• periodicity

3 things in assessing the risk of material misstatement

account balances

transaction classes

disclosures

financial statement assertions

occurence

completeness

accuracy

cutoff

classification

presentation

risk assessment

prep of the financial statements

selection/application of significant account principles

IT general control

the control environment

performing an analytical procedure

the auditor should use their understanding of the company’s understanding of the company to develop expectations about plausible relationships among the data to be used in the procedure

audit program

should be prepared for all audit engagements that lists the procedures intended to be performed

lead auditor

should respect each other auditor on the engagement team

supervision of engagement team members

• objectives of the procedures

• timing nature and extent

• relevant aspects of the company, environment, internal control