CH 8 Flashcards
What are three reasons for planning an audit?
1) obtain sufficient appropriate evidence
2) keep low costs
3) avoid a client’s misunderstanding?
What are three risk terms?
1) zero risk
2Acceptable audit risks
3) Inherent risk
What are the steps to perform initial audit planning?
1) client acceptance and continuance
2) Identify client’s reasons for audit
3) Obtain an understanding with the client
4) develop overall audit strategy
What are two major factors affecting acceptable risk?
1) likely statement users
2) Intended uses of the statements
What should a engagement letter entail?
1) audit objectives
2) management and auditor’s responsibilities
3) Informs client that auditor cannot guarantee all acts of fraud will be discovered
What should a preliminary audit strategy consider and what kind of help is needed?
client’s industry
material misstatement areas
number of client locations
Past effectiveness of controls
Help from staff continuity and need for specialist if needed
How should an auditor understand and identify company’s business risks?
Declines in economic conditions
Information technology is used between company and clients.
Global operations that expand from joint ventures or strategic alliances
Human capital’s complexity
intangible assets ‘s complexity
What should an auditor understand in a client’s business environment?
1) Risks associated with specific industries
2) Inherent risks are familiar and expected in certain industries
3) accounting requirements in a specific industry.
What are the business operations that influence business risks?
1) major sources of rev
2) Key customers and suppliers
3) sources of financing
4) information about related parties
What are related parties?
affiliated companies
Principal owners of the client
any other party with which the client deals
A party who can influence management or client policies
How do you prepare analytic procedures?
1) comparing the following
a) short-term debt paying ability
b) Liquidity Activity Ratios
c) Ability to meet Long term Obligations
d) Profitability ratios
How do you plan an audit design?
1) Set materiality and assess acceptabl audit risk and inherent risk
2) Understand internal control and assess control risk
3) Gather information to assess fraud
4) Develop overall audit strategy and audit problem
Analytic procedures are performed three times during a audit. When are they applied?
1) required in planning phase
a) determine nature, extent, and timing of audit procedures
2) testing phase
a) to support account balances
b) often done in conjunction with other audit procedures
3) completion phase
a) more objective looks a reports
what are five types of analytical procedures?
1) industry data ( board data could be misleading)
2) Client-determined expected results (budgets that are actual and master)
3) Similar prior-period data ( comparing:
a) current year’s balance with preceding yr b) detail of total balance with similar detail for preceding yr
c) ratios and percent relationships with preceding yr.
4) Auditor-determined expected results
5) Expected result using nonfinancial data (# of hotal rooms, etc)( not very useful)
