MODERN AUDITING 7th Edition Developed by: Gregory K. Lowry, MBA, CPA Saint Paul’s College John Wiley & Sons, Inc. William C. Boynton California Polytechnic State University at San Luis Obispo Raymond N. Johnson Portland State University Walter G. Kell University of Michigan

CHAPTER 7 ACCEPTING THE ENGAGEMENT AND PLANNING THE AUDIT u Overview of a Financial Statement Audit u Client Acceptance and Retention u Planning the Audit u Obtaining an Understanding of the Client’s Business and Industry u Performing Analytical Procedures

Overview of a Financial Statement Audit 4 Phases of an Audit 1. Client Acceptance and Retention 2. Planning the Audit 3. Performing Audit Tests 4. Reporting the Findings

Steps in Accepting an Audit Engagement Figure 7-1

Preparing the Engagement Letter The form and content of engagement letters may vary for different clients, but they should generally include the following: 1. Clear identification of the entity and the financial statements to be audited 2. The objective or purpose of the audit 3. Reference to the professional standards to which the auditor will adhere

Preparing the Engagement Letter 4. An explanation of the nature and scope of the audit and the auditor’s responsibilities 5. A statement to the effect that a properly designed and executed audit may not detect all material irregularities

6. A Reminder to management that it is responsible for the preparation of the financial statements and for the maintenance of an adequate internal control system 7. An indication that management will be asked to provide certain written representations to the auditor Preparing the Engagement Letter

8. A description of any auxiliary services to be provided by the auditor such as the preparation or review of tax returns 9. The basis on which fees will be computed and any billing arrangements 10. A statement to the effect that a properly designed and executed audit may not detect all material irregularities Preparing the Engagement Letter

Key Steps in Planning the Audit Figure 7-3

Overview of Business Cycle Figure 7-4

Understanding the Client’s Business Figure 7-5

Analytical procedures are used in auditing for the following purposes: 1. In the planning phase of the audit, to assist the auditor in planning the nature, timing, and extent of other auditing procedures 2. In the testing phase, as a substantive test to obtain evidential matter about particular assertions related to account balances or classes of transactions 3. At the conclusion of the audit, in a final review of the overall reasonableness of the audited financial statements Performing Analytical Procedures

The following steps are involved in performing analytical procedures: 1. Identify calculations and comparisons to be made 2. Develop expectations 3. Perform the calculations/comparisons 4. Analyze data and identify significant differences 5. Investigate significant unexpected differences 6. Determine effects on audit planning Performing Analytical Procedures

CHAPTER 7 ACCEPTING THE ENGAGEMENT AND PLANNING THE AUDIT

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