Lesson 8 – Planning the Audit
Lecture 8.1 – Introduction to Planning the Audit
Main Reasons for Planning an Audit
enable the auditor to obtain sufficient appropriate evidence
to help keep audit costs reasonable
to avoid misunderstandings with the client (expectations of client, eliminate misunderstandings)
Planning an Audit and Designing an Audit Approach
1. Accept client and perform initial audit planning – Acceptable Audit Risk
2. Understand the client’s business and industry – Inherent Risk
3. Assess client business risk – Inherent Risk
4. Perform preliminary analytical procedures – Inherent Risk
-required in planning phase of audit
-learn about possible areas of misstatement in audit process
*assessed for every transaction cycle and different accounts
5. Set materiality and assess acceptable audit risk and inherent risk – Acceptable Audit Risk
6. Understand internal controls and assess control risk – Control Risk
7. Gather information to assess fraud risks – Inherent Risk
8. Develop overall audit plan and audit program – Planned Detection Risk
*based on components of audit risk model
-planned detection risk determines the amount of evidence that the auditor plans to accumulate
auditor will determine what planned detection risk should be and appropriate audit procedures to gather necessary evidence to form audit opinion
Lesson 8.2 – Evaluating Acceptable Audit Risk
Initial Audit Planning
1. Client acceptance and continuance
*most important part of initial audit planning – deciding whether to accept/continue with client
**client = audit committee
Sabanes-Oxley shifts responsibility for hiring and firing of the auditor from management to the audit committee
What potential client MIGHT the auditor turn down?
clients where acceptable audit risk is at an unreasonably low level – audit would not be possible to perform in a cost effective way or accept the risk associated with issuing an incorrect opinion
-clients lacking integrity
-financially unstable client
*even if auditor performs audit consistent with GAAS, unhappy investors/shareholders could sue auditor for having deep pockets
-clients in high risk industries (start-up companies)
-client unable to pay audit fees
What kind of procedures does auditor perform when determining to accept a client?
auditing standards require the successor (new) auditor to communicate with the predecessor (old)
predecessor will have information that will be useful to new auditor in determining whether to accept the client -integrity of management -disputes with client (accounting principles, audit procedures, audit fees)
*AICPA – client must give permission for communication
-successor is REQUIRED to initiate the communication
-predecessor is REQUIRED to respond
Client Acceptance Issues
if prospective client HAS NOT BEEN AUDITED BEFORE, the auditor may base client acceptance on discussion with:
-lawyers, banks, other businesses
Client Acceptance and Continuing
CONTINUING CLIENTS
-decisions should be made every year
-annual evaluations whether to continue based on issues, fees, and client integrity
2. Identify client’s reasons for an audit
would affect auditor’s assessment of acceptable audit risk
Two major factors affecting acceptable risk
-likely statement users
-intended uses of the statements
Acceptable audit risk will be lower for some clients than others
*because of audit risk, an auditor will typically gather more evidence for:
-publicly held clients nature, clients have shareholders who are not intimately involved with the firm, rely on financial statements to make decisions on the firm
-acceptable audit risk: low
-clients with high levels of debt – make lending decisions
-clients changing ownership (potential buyers of the company)
3. Obtain an understanding with the client
Obtain an engagement letter
-the intent is to document terms of the audit and minimize misunderstandings
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