Care for Kids Essay

Submitted By czarinakelly
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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
-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