chapt8

©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 8 - 1

Audit Planning andAnalytical Procedures

Chapter 8


Planning

The work is to be adequately planned, andassistants, if any, are to be properly supervised.

Acceptable audit risk – how willing is auditor to accept F/S may be materially misstated after the audit is

completed & the opinion is issued.


Planning

Inherent risk – assessment of likelihood that there are material misstatements in accounts before considering effectiveness

of internal controls.

Control risk – assessment of likelihood that misstatements exceeding a tolerable amount in accounts will not be prevented or detected by the client’s internal controls.


Planning an Audit and Designing an Approach

I. Accept client andperform initialaudit planning

II. Understand theclient’s business

and industry

III. Assess clientbusiness risk

IV. Perform preliminaryAnalytical procedures


Planning an Audit and Designing an Approach

V. Set materiality, andassess acceptable auditrisk and inherent risk

VI. Understand internalcontrol and assess

control risk

VII. Develop overallaudit plan andaudit program


Initial Audit Planning

Should the auditor accept a new client?

Identify why the client wants or needs an audit.

Obtain an understanding with the client.

Select staff for the engagement.


II. Understanding of the Client’s Business and Industry

A. Understand Client’s Business and Industry

B. Industry and External Environment

C. Business Operations and Processes

D. Management and Governance

E. Objectives and Strategies

F. Measurement and Performance


A. Understanding of the Client’s Business and Industry

What are some factors that have increasedthe importance of understanding the

client’s business and industry?

Informationtechnology

Globaloperations

Humancapital


B. Industry and External Environment

What are some reasons for obtaining an understanding of the client’s industry and external environment?

Risks associated with

specific industries

Inherent risks common to all clients in certain industries

Unique accounting requirements


C. Business Operationsand Processes

Factors the auditor should understand:

– major sources of revenue

– sources of revenue

– key customers and suppliers

– sources of financing

– information about related parties

– ability to obtain financing


D. Management and Governance

Management establishes the strategies andprocesses followed by the client’s business.

Governance includes the client’s organizationalstructure, as well as the activities of the board

of directors and the audit committee.

Corporate charter and bylaws

Minutes of meetings


E. Client Objectivesand Strategies

Strategies are approaches followed by theentity to achieve organizational objectives.

Auditors should understand client objectives.

Financialreportingreliability

Effectivenessand efficiencyof operations

Compliancewith laws and

regulations


F. Measurement and Performance

The client’s performance measurement systemincludes key performance indicators. Examples:

Performance measurement includes ratio analysisand benchmarking against key competitors.

– market share – sales per employee

– unit sales growth – Web site visitors

– same-store sales – sales/square foot


III. Assess Client Business Risk

Client business risk is the risk that theclient will fail to achieve its objectives.

What is the auditor’s primary concern?

– material misstatement of the financialstatements due to client business risk


The Client’s Business Risk, and

Auditor’s Risk Assessment

Industry and External Environment

Business Operations and Processes

Management and Governance

Objectives and Strategies

Measurement and Performance

Understand Client’sBusiness and Industry

Assess ClientBusiness Risk

Assess Risk ofMaterial Misstatements


IV. Perform Analytical Procedures

First, analytical procedures use comparison of client ratios to industry or competitor

benchmarks to provide anindication of the company’s performance.

Second, analytical procedures use comparisons and relationships to assess whether account

balances or other data appear reasonable. SAS 56


Timing and Purpose of Analytical Procedures

(Required)Planning Phase

Purpose

Understand client’sindustry and business

Assess going concern

Indicate possible misstatements(attention directing)

Reduce detailed tests

Primary purpose

Secondary purpose

Primary purpose

Secondary purpose



TestingPhase

Purpose


Assess going concern



Secondary purpose

Primary purpose



(Required)Completion Phase

Purpose


Access going concern



Secondary purpose

Primary purpose


Five Major Types ofAnalytical Procedures

1. Compare client and industry data.2. Compare client data with similar

prior-period data.3. Compare client data with

client-determined expected results.4. Compare client data with

auditor-determined expected results.

5. Compare client data with expected results, using nonfinancial data.


Summary of Analytical Procedures

They involve the computation of ratios and other comparisons of recorded amounts to auditor expectations.

They are used in planning to understand the client’s business and industry.

They are used throughout the audit to identifypossible misstatements, reduce detailed tests,

and to assess going-concern issues.


Summary of the Purposesof Audit Planning

Gain an understanding of the client’s business and industry.

Assess risks – business risk, inherent risk, control risk, and acceptable audit risk.

Set materiality and develop overallaudit plan and audit program.


Key Parts of Planning

Accept Client and PerformInitial Planning

New clientacceptance and

continuance

Identify client’sreasons forthe audit

Obtain anunderstanding

with client

Staff theengagement



Understand the Client’sBusiness and Industry

Understandclient’s industry

and externalenvironment

Understandclient’s operations,

strategies, andperformance system



Assess ClientBusiness Risk

Assess clientbusiness risk

Evaluate managementbusiness controls

affecting business risk

Assess riskof material

misstatements



Perform PreliminaryAnalytical Procedures