Professional Documents
Culture Documents
Audit Planning
Audit Planning
Audit Planning
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Perform preliminary analytical procedures.
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1
Discuss why adequate audit planning is
essential.
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1. To obtain sufficient appropriate evidence
for the circumstances
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➢ Acceptable audit risk
➢ Inherent risk
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2
Make client acceptance decisions and perform
initial audit planning.
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1. Client acceptance and continuance
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➢New client investigations
▪If previously audited, the new auditor is
required to communicate with the
predecessor auditor
▪Client permission required
➢Continuing clients
▪Annual evaluations whether to continue
based on issues, fees, and client integrity
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➢Two major factors affecting acceptable risk
▪Likely statement users
▪Intended uses of the statements
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3
Gain an understanding of the client’s business and
industry.
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Client business risk is the risk
that the client will fail to meet
its objectives.
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Reasons for obtaining an understanding of the
client’s industry and external environment:
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Factors the auditor should understand:
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Touring the physical facilities
enables the auditor to assess
asset safeguards and interpret
accounting data related to assets.
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➢Affiliated companies
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Governance includes:
Governance insights:
➢Organizational
➢Corporate charter
structure
and bylaws
➢Board activities
➢Code of ethics
➢Audit committee
➢Meeting minutes
activities.
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In response to the Sarbanes-Oxley Act, the SEC
now requires each public company to disclose
whether is has adopted a code of ethics that
applies to senior management.
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Strategies are approaches followed by the
entity to achieve organizational objectives.
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The client’s performance measurement system
includes key performance indicators. Examples:
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4
Assess client business risk.
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Client business risk is the risk that the
client will fail to achieve its objectives.
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Management must certify it has designed
disclosure controls and procedures to
ensure that material information about
business risks is made known to them.
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5
Perform preliminary analytical procedures.
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Comparison of client ratios to industry
or competitor benchmarks provides an
indication of the company’s performance.
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A major purpose is to gain an understanding
of the client’s business and industry.
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➢Set materiality and assess
acceptable audit risk
and inherent risk.
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Analytical procedures may be performed
at any of three times during an
engagement.
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7
Select the most appropriate analytical
procedure from among the five major types.
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Compare client data with:
1. Industry data
2. Similar prior-period data
3. Client-determined expected results
4. Auditor-determined expected results
5. Expected results using nonfinancial data.
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Client Industry
2014 2013 2014 2013
Inventory turnover 3.4 3.5 3.9 3.4
Gross margin 26.3% 26.4% 27.3% 26.2%
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2014 2013
(000) % of (000) % of
Prelim. Net sales Prelim. Net sales
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8
Compute common financial ratios.
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➢Short-term debt-paying ability
➢Profitability ratios
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(Cash + Marketable securities)
Cash ratio =
Current liabilities
Current assets
Current ratio =
Current liabilities
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Accounts receivable Net sales
=
turnover Average gross receivables
365 days
Days to collect
= Accounts receivable
receivable
turnover
Inventory Cost of goods sold
=
turnover Average inventory
Days to sell 365 days
=
inventory Inventory turnover
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Total liabilities
Debt to equity =
Total equity
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Earnings Net income
=
per share Average common shares outstanding
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Return on Income before taxes
=
assets Average total assets
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Compare ratios of recorded amounts to
auditor expectations.
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Copyright
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