LECTURE OUTLINE CHAPTER 6

Audit Planning, Understanding the Client,

Assessing Risks and Responding






Brief Topical Outline

A. The audit process
1. Obtaining clients (PowerPoint 6-2)
Submit a proposal
communicate with predecessor auditors
2. Overall process (PowerPoint 6-3,4)

B. Audit planning (PowerPoint 6-5)
1. Establish an understanding with client, ordinarily through use oI an engagement letter
(PowerPoints 6-6, and 6-7)
2. Overall on audit planning (PowerPoint 6-8)

C. Obtain an understanding oI the client and its environment
1. Risk assessment procedures (PowerPoint 6-9)
2. Business risk approach to the audit (PowerPoint 6-10 through 6-16)
3. Materiality

D. Assess the risks oI material misstatement and design Iurther audit procedures
1. Overall approach (PowerPoint 6-17)
2. Assessing Iraud risks (PowerPoints 6-18 through 6-21)
3 Design Iurther audit procedures (PowerPoints 6-22 and 6-23)

E. Organization oI the audit program
1. The systems portion
2. The substantive test portion (PowerPoint 6-24)
3. Analyzing transactions aIIecting accounts (PowerPoint 6-25)
4. Indirect veriIication oI income statement accounts (PowerPoint 6-26)
5. Assertions, obiectives and procedures (PowerPoint 6-27)
Management assertions
Direction oI audit testing (PowerPoint 6-28)
Substantive obiectives Ior the audit oI asset accounts
An illustration oI program design (PowerPoint 6-29)

F. Timing oI audit work

1. Procedures that may always be perIormed at interim date
2. Procedures that may be perIormed at an interim date under certain circumstances


Comments and Observations

Chapter 6 provides a discussion (1) obtaining clients, (2) audit planning, (3) understanding the client, and
(4) assessing risks and responding, including designing audit programs. DiIIicult proIessional decisions
may be involved in the Iirst step in the planning process, accepting a client. When the auditors have
a question about whether to accept an engagement the appropriate decision is seldom clear-cut. The
auditors are oIten Iaced with conIlicting inIormation as to the acceptability oI the client. The Ethics Case
Ior this chapter, Case 6-45, illustrates this point. You should review the legal liability oI the auditors
under common law, because the Iacts indicate that the audit is to be perIormed Ior a speciIic third party.
In reviewing this case in class, don`t erroneously question the independence oI the audit partner because
she and the owner oI the potential client both are on the board oI directors oI the civic organization.
Chapter 6 emphasizes steps 1-3 oI the inIormation presented on PowerPoint 6-3. Our obiective at
this point is to see a complete picture oI an engagement so that you will have a better understanding oI
how the pieces Iit together as we later discuss speciIic topics, such as the auditors' consideration oI
internal control oI internal control and substantive procedures Ior various types oI accounts.
As presented in 6$6108, audit planning involves establishing an understanding with the client,
ordinarily through use oI an engagement letter, and developing an overall strategy Ior perIorming the
auditthis is a much more limited concept oI planning than that included in previous proIessional
standards. Much oI what previously was considered 'audit planning is now included as the second and
third steps oI the audit process, obtaining an understanding and assessing the risk oI material
misstatement.
While audit planning starts at the beginning oI the audit, it continues throughout the entire audit as
auditors react to inIormation obtained. You should be aware oI the importance oI the engagement letter
in preventing misunderstandings between the auditors and the clientCan you think oI other matters that a
Iirm might consider including in an engagement letter (PowerPoints 6-6 and 6-7)?
Many oI you have heard about the time pressures that staII auditors Iace. You , as an auditor,will
have a good deal oI interest in the use oI time budgets. There are positive aspects oI time budgets, such
as helping to assure that suIIicient audit time is devoted to critical audit areas.
The second step in the audit process is obtaining an understanding oI the client and its
environment. As indicated, this material previously was considered a part oI planning. In this stage,
auditors perIorm risk assessment procedures as presented on PowerPoint 6-9.
Many audit Iailures have resulted, in part, because the auditors perIorming the engagement did not
appear to have an adequate understanding oI the client's business or problems Iacing the client's industry.
The auditor should review sources oI inIormation about the client's business and the industry in which it
operates. The large CPA Iirms are attempting to obtain a more complete understanding oI their client`s
business risks, and using this inIormation to assess Iinancial reporting risk and plan the audit. In doing
so, they delve into the business processes oI the clients, and use strategic models (e.g., Porter`s model) to
analyze the client`s industry and business.
Next the auditor considers assessing the risks oI material misstatement and designing Iurther audit
proceduresthe third step in the audit process. The auditor must address Iraud risks, and the designing
oI Iurther audit procedures to comply with 6$61R`s requirement to assess the risk oI misstatement
due to Iraud.
Chapter 6 also describes the manner in which audit programs are developed. The substantive
portion oI audit programs is organized around the balance sheet accounts. Which balance sheet and
income statement accounts are interrelated? See (PowerPoint 6-26).
You should be aware oI the relationship among assertions, obiectives, and procedures . Using the
obiectives makes it much easier to remember the speciIic procedures to audit a speciIic account. Also,
programs are likely to be eIIicient and eIIective, because redundant audit procedures are more apparent,
as are obiectives that are not achieved by the audit procedures.