modern auditing ch07

Modern Auditing:Modern Auditing:Assurance Services and the Assurance Services and the

Integrity of Financial Reporting, 8Integrity of Financial Reporting, 8thth EditionEdition

Modern Auditing:Modern Auditing:Assurance Services and the Assurance Services and the

Integrity of Financial Reporting, 8Integrity of Financial Reporting, 8thth EditionEdition

William C. BoyntonWilliam C. BoyntonCalifornia Polytechnic State California Polytechnic State

University at San Luis ObispoUniversity at San Luis Obispo

Raymond N. Raymond N. JohnsonJohnson

Portland State UniversityPortland State University

Chapter 7 – Accepting the Engagement and Planning the Audit

Chapter 7 OverviewChapter 7 OverviewChapter 7 OverviewChapter 7 Overview

Client Acceptance and Client Acceptance and RetentionRetention

Client Acceptance and Client Acceptance and RetentionRetention

Evaluating the Integrity of Evaluating the Integrity of ManagementManagement

Evaluating the Integrity of Evaluating the Integrity of ManagementManagement

• Communicate with the Predecessor Auditor

• Make Inquiries of Other Third Parties

• Review Previous Experience with Existing Clients

Identifying Special Identifying Special Circumstances and Unusual Circumstances and Unusual

RisksRisks

Identifying Special Identifying Special Circumstances and Unusual Circumstances and Unusual

RisksRisks• Identify Intended Users of Audited

Statements

• Assess Prospective Client’s Legal and Financial Stability

• Identify Scope Limitations

• Evaluate the Entity’s Financial Reporting Systems and Auditability

Assessing Competence to Assessing Competence to Perform the AuditPerform the Audit

Assessing Competence to Assessing Competence to Perform the AuditPerform the Audit

• Services Desired

• Identify the Audit Team– Partner– Manager(s)– Senior(s)– Staff Assistants

• Consider Need for Consultation and Specialists

Evaluating IndependenceEvaluating IndependenceEvaluating IndependenceEvaluating Independence

• Identify Circumstances Impairing Independence

• Identify Professional Staff Financial and Business Relationships

• Identify Conflicts of Interest with Other Clients

Making the Decision to Accept Making the Decision to Accept or Decline the Auditor Decline the Audit

Making the Decision to Accept Making the Decision to Accept or Decline the Auditor Decline the Audit

• Integrity of Management

• Special Circumstances and Unusual Risks

• Competence Issues

• Independence Issues

Preparing the Engagement Preparing the Engagement LetterLetter


• Clear identification of entity and financial statements to be audited

• Objective or purpose of the audit

• Reference to professional standards to be followed

• Explain nature and scope of audit and auditor’s responsibilities



• Statement that not all material fraud may be detected

• Reminder of management responsibility for financial statements and internal controls

• Indicate potential request for written representations

• Describe any auxiliary services to be provided



• Basis on which fees will be computed and billing arrangements

• Request to confirm terms of engagement by signing and returning a copy to the auditor

Study BreakStudy BreakStudy BreakStudy Break

1. While evaluating the integrity of management, which would be considered to be the least useful?

A. Inquiries of managementB. Communications with preceding

auditorC. Inquiries of other third partiesD. Evaluate previous experiences with

client

A. Inquiries of management


2. Outside specialists include all of the following except:

A. AppraisersB. Internal auditorsC. ActuariesD. Attorneys

B. Internal auditors

Risk Assessment Risk Assessment ProceduresProcedures

Risk Assessment Risk Assessment ProceduresProcedures

Understanding the Entity and Understanding the Entity and Its EnvironmentIts Environment

Understanding the Entity and Understanding the Entity and Its EnvironmentIts Environment

Industry, Regulatory, and Industry, Regulatory, and Other External FactorsOther External Factors

Industry, Regulatory, and Industry, Regulatory, and Other External FactorsOther External Factors

• Industry Conditions

• Regulatory Environment

• Other External Factors Affecting the Entity’s Business

The Nature of the Entity and The Nature of the Entity and Accounting PoliciesAccounting Policies

The Nature of the Entity and The Nature of the Entity and Accounting PoliciesAccounting Policies

• Business Operations

• Investing Activities

• Financing Activities

• Financial Reporting

Entity’s Objectives, Strategies, Entity’s Objectives, Strategies, and Related Business Risksand Related Business Risks

Entity’s Objectives, Strategies, Entity’s Objectives, Strategies, and Related Business Risksand Related Business Risks

• Entity’s Objectives

• Entity’s Strategies

• Business Risks

• Effects of Implementing a Strategy

Measurement and Review of Measurement and Review of the Entity’s Financial the Entity’s Financial

PerformancePerformance

Measurement and Review of Measurement and Review of the Entity’s Financial the Entity’s Financial

PerformancePerformance• Ratios and Operating Statistics

• Performance Indicators

• Employee Performance Measures and Incentive Compensation Plans

• Industry Trends

• Forecasts, Budgets, and Variance Analysis

• Analyst Reports and Credit Rating Reports


3. In order to understand the entity’s ______, we must understand matters such as the accounting principles, revenue recognition practices, and financial statement presentation and disclosure.

A. Business OperationsB. Investing ActivitiesC. Financing ActivitiesD. Financial Reporting

D. Financial Reporting


4. ______ are the operational approaches by which management intends to achieve its objectives.

A. Entity’s objectivesB. Entity’s strategiesC. Business risksD. Financing activities

B. Entity’s strategies

modern auditing ch07

Documents