RR Chapter 08

Learning Objective 1
Audit Planning and Discuss why adequate audit

Analytical Procedures planning is essential.
Chapter 8
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 8-1 2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 8-2
Three Main Reasons for

Risk Terms
Planning
1. To obtain sufficient competent evidence Acceptable audit risk
for the circumstances
Inherent risk
2. To help keep audit costs reasonable
3. To avoid misunderstanding with the client
Planning an Audit and Planning an Audit and

Designing an Audit Approach Designing an Audit Approach
Accept client and perform initial audit planning. Set materiality and assess acceptable audit risk
and inherent risk.
Understand the clients business and industry.
Understand internal control and assess control risk.
Assess client business risk.
Gather information to assess fraud risks.
Perform preliminary analytical procedures.
Develop overall audit plan and audit program.
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 1-1

Learning Objective 2 Initial Audit Planning
Make client acceptance decisions Client acceptance and continuance
and perform initial audit planning. Identify clients reasons for audit
Obtain an understanding with the client
Develop overall audit strategy
Understanding of the Clients

Business and Industry
Gain an understanding of the Factors that have increased the
importance of understanding the
clients business and industry. clients business and industry:
Information technology
Global operations
Human capital
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 8-9 2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 8 - 10
Understanding of the Clients Industry and External

Business and Industry Environment
Understand clients business and industry Reasons for obtaining an understanding of the
clients industry and external environment:
Industry and external environment
1. Risks associated with specific industries
Business operations and processes
2. Inherent risks common to all clients in
Management and governance certain industries
3. Unique accounting requirements
Objectives and strategies
Measurement and performance

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 8 - 11 2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 8 - 12

Business Operations
and Processes Tour the Plant and Offices
Factors the auditor should understand: By viewing the physical facilities,
the auditor can asses physical
safeguards over assets and interpret
Major sources of revenue
accounting data related to assets.
Key customers and suppliers
Sources of financing
Information about related parties
Management and Governance

Identify Related Parties
A related party is defined as an affiliated Management establishes the strategies and
company, a principal owner of the client processes followed by the clients business.
company, or any other party with which
the client deals, where one of the parties Governance includes the clients organizational
can influence the management or structure, as well as the activities of the board
policies of the other. of directors and the audit committee.
Corporate charter and bylaws

Code of ethics
Meeting minutes
Client Objectives and

Code of Ethics
Strategies
In response to the Sarbanes-Oxley Act, the SEC Strategies are approaches followed by the
now requires each public company to disclose entity to achieve organizational objectives.
whether is has adopted a code of ethics that
applies to senior management. Auditors should understand client objectives.
Financial reporting reliability

The SEC also requires companies to disclose
amendments and waivers to the code of ethics. Effectiveness and efficiency of operations
Compliance with laws and regulations

Measurement and
Performance
The clients performance measurement system Assess client business risk.
includes key performance indicators. Examples:
market share Web site visitors

sales per employee same-store sales
unit sales growth sales/square foot
Performance measurement includes ratio analysis

and benchmarking against key competitors.
Clients Business, Risk, and

Assess Client Business Risk
Risk of Material Misstatement
Client business risk is the risk that the Industry and external environment
Understand clients
client will fail to achieve its objectives. business and industry
Business operations and processes
What is the auditors primary concern?

Management and governance
Assess client business
Material misstatements in the financial risk
statements due to client business risk Objectives and strategies
Assess risk of material Measurement and performance

misstatements
Sarbanes-Oxley (new title) Enterprise Risk Management
The Sarbanes-Oxley Act requires that Enterprise risk management (ERM) has
management certify it has designed emerged as a new paradigm for managing risk.
disclosure controls and procedures to
ensure that material information about ERM integrates and coordinates risk
business risks is made known to them. management across the entire enterprise.
It also requires that management certify

it has informed the auditor and audit
committee of any significant deficiencies
in internal control.

Preliminary Analytical
Procedures
Perform preliminary analytical Comparison of client ratios to industry
or competitor benchmarks provides an
procedures. indication of the companys performance.
Preliminary tests can reveal unusual

changes in ratios.
Examples of Planning Summary of the Parts

Analytical Procedures of Auditing Planning
Selected Ratios Client Industry
A major purpose is to gain an understanding
Short-term debt-paying ability: of the clients business and industry.
Current ratio 3.86 5.20
Liquidity activity ratio:
Inventory turnover 3.36 5.20
Ability to meet long-term obligations:
Debt to equity 1.73 2.51
Profitability ratio:
Profit margin 0.05 0.07
Key Parts of Planning Key Parts of Planning
Accept client and perform initial planning Understand the clients business and industry
New client acceptance and continuance Understand clients industry and external
environment
Identify clients reasons for audit
Understand clients operations, strategies,
Obtain an understanding with client and performance system
Staff the engagement

Key Parts of Planning Key Parts of Planning
Perform preliminary analytical procedures

Assess client business risk
Evaluate management controls

affecting business risk
Assess risk of material misstatements
Learning Objective 6 Analytical Procedures
State the purposes of analytical SAS 56 emphasizes the expectations

developed by the auditor.
procedures and the timing
of each purpose. 1. Required in the planning phase
2. Often done during the testing phase
3. Required during the completion phase
Timing and Purposes of

Analytical Procedures
(Required) (Required)
Planning Testing Completion Select the most appropriate
Purpose Phase Phase Phase
Understand clients Primary analytical procedure from
industry and business purpose
among the five major types.
Assess going concern Secondary Secondary
purpose purpose
Indicate possible Primary Secondary Primary
misstatements
(attention directing) purpose purpose purpose
Reduce detailed tests Secondary Primary
purpose purpose

Five Types of Analytical Compare Client and Industry
Procedures Data
Compare client data with: Client Industry
2007 2006 2007 2006
1. Industry data
2. Similar prior-period data Inventory turnover 3.4 3.5 3.9 3.4
Gross margin 26.3% 26.4% 27.3% 26.2%
3. Client-determined expected results
4. Auditor-determined expected results
5. Expected results using nonfinancial data.
Compare Client Data with

Similar Prior Period Data
2007 2006
(000) % of (000) % of
Compute common financial ratios.
Prelim. Net sales Prelim. Net sales
Net sales $143,086 100.0 $131,226 100.0

Cost of goods sold 103,241 72.1 94,876 72.3
Gross profit $ 39,845 27.9 $ 36,350 27.7
Selling expense 14,810 10.3 12,899 9.8
Administrative expense 17,665 12.4 16,757 12.8
Other 1,689 1.2 2,035 1.6
Earnings before taxes $ 5,681 4.0 $ 4,659 3.5
Income taxes 1,747 1.2 1,465 1.1
Net income $ 3,934 2.8 $ 3,194 2.4
Common Financial Ratios Short-term Debt-paying Ability
Short-term debt-paying ability (Cash + Marketable securities)

Cash ratio =
Current liabilities
Liquidity activity ratios (Cash + Marketable securities
Quick ratio = + Net accounts receivable)
Ability to meet long-term debt obligations Current liabilities
Current assets
Profitability ratios Current ratio =
Current liabilities

Ability to Meet Long-term Debt
Liquidity Activity Ratios
Obligation
Accounts receivable Net sales Total liabilities
= Debt to equity =
turnover Average gross receivables Total equity
Days to collect 365 days
= Times interest Operating income
receivable Accounts receivable turnover =
earned Interest expense
Inventory Cost of goods sold
=
turnover Average inventory
Days to sell 365 days
=
inventory Inventory turnover
Profitability Ratios Profitability Ratios
Earnings Net income Return on Income before taxes

= =
per share Average common shares outstanding assets Average total assets
Return on (Income before taxes

Gross profit (Net sales Cost of goods sold) common = Preferred dividends)
=
percent Net sales equity Average stockholders equity
Operating income
Profit margin =
Net sales
Summary of Analytical
Procedures
They involve the computation of ratios
and other comparisons of recorded
End of Chapter 8
amounts to auditor expectations.
They are used in planning to understand

the clients business and industry.
They are used throughout the audit to identify

possible misstatements, reduce detailed tests,
and to assess going-concern issues.

RR Chapter 08

Загружено:

Сведения о документе

Оригинальное название

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

RR Chapter 08

Загружено:

Авторское право:

Доступные форматы

Learning Objective 1

Audit Planning and Discuss why adequate audit

Three Main Reasons for

3. To avoid misunderstanding with the client

Planning an Audit and Planning an Audit and

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 1-1

Make client acceptance decisions Client acceptance and continuance

Obtain an understanding with the client

Develop overall audit strategy

Understanding of the Clients

Understanding of the Clients Industry and External

Measurement and performance

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 1-2

Management and Governance

Corporate charter and bylaws

Client Objectives and

Financial reporting reliability

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 1-3

market share Web site visitors

Performance measurement includes ratio analysis

Clients Business, Risk, and

What is the auditors primary concern?

Assess risk of material Measurement and performance

Sarbanes-Oxley (new title) Enterprise Risk Management

It also requires that management certify

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 1-4

Preliminary tests can reveal unusual

Examples of Planning Summary of the Parts

Key Parts of Planning Key Parts of Planning

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 1-5

Perform preliminary analytical procedures

Evaluate management controls

Assess risk of material misstatements

Learning Objective 6 Analytical Procedures

State the purposes of analytical SAS 56 emphasizes the expectations

Timing and Purposes of

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 1-6

Compare Client Data with

Net sales $143,086 100.0 $131,226 100.0

Common Financial Ratios Short-term Debt-paying Ability

Short-term debt-paying ability (Cash + Marketable securities)

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 1-7

Profitability Ratios Profitability Ratios

Earnings Net income Return on Income before taxes

Return on (Income before taxes

They are used in planning to understand

They are used throughout the audit to identify

2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 1-8

Вам также может понравиться