Chapter 8 Flashcards
three main reasons for audit planning
enable auditor to obtain sufficient appropriate evidence for the circumstances,
help keep audit costs reasonable
avoid misunderstandings with the client
acceptable audit risk
measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued
inherent risk
measure of the auditor’s assessment of the likelihood that there are material misstatements in an account balance before considering the effectiveness of internal control
initial audit planning
- the auditor decides whether to accept a new client or continue serving an existing one
- auditor identifies why the client wants or needs an audit
- to avoid misunderstandings, the auditor obtains an understanding with the client about the terms of the engagement
- the auditor develops an overall strategy for the audit, including engagement staffing and any required audit specialists
new client investigation
you must communicate with the prior auditor of any new client, the prior auditor must consult the client first though
continuing clients
sometimes auditors evaluate existing customers
engagement letter
including the engagement’s objectives, the responsibilities of the auditor and management, reference to the expected form and content of the audit report, and the engagement’s limitations
audit strategy
sets the scope, timing, and direction of the audit and that guides the development of the audit plan
select staff for audit
staff has to be competent
evaluate need for outside specialists
if there is specific knowledge the auditor would consult a specialist
three reasons to obtain a knowledge of the clients industry
- risks associated with a specific industry
- inherent risks associated with industry
- unique accounting requirements
related party
an affiliated company, a principal owner of the client company, or any other party with which the client deals, where one of the parties can influence the management or operating policies of the other
related party transaction
any transaction between the client and a related party
related parties
should be found and included in the permanent section
corporate minutes
official record of the meetings of the board of directors and stockholders
client business risk
the risk that the client will fail to achieve its objectives
audit planning process
accept client and perform initial audit planning
understand the client’s business and industry
assess client business risk
perform preliminary analytical procedures
set materiality and assess acceptable audit risk and inherent risk
understand internal control and assess control risk
gather information to assess fraud risks
develop overall audit strategy and audit program
analytical procedures
evaluations of financial info through analysis of plausible relationships among financial and nonfinancial data
five types of analytical procedures
industry data similar prior period data client determined expected results auditor determined expected results expected results using nonfinancial data
ratios?
do we need to know them?
