chap 8&9 - audit planning & risk

7/28/2019 Chap 8&9 - Audit Planning & Risk

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AUDIT PLANNING &

AUDIT RISKChapter

8&9


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STUDY OBJECTIVES

Understand types of audit risk and audit risk

model; Understand why adequate audit planning is

essential;

Make client acceptance decisions and performinitial audit planning;

Assess client business risk; Perform preliminary analytical procedures; Planning an audit.

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Auditors accept some level of risk inperforming the audit.

Risks exist, are difficult to measure, and

require careful thought in response.

Proper risk response is critical to achieving a

high-quality audit.

RISK

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AR = IR X CR X DR

AUDIT RISK MODEL


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PDR = AAR (IR CR)

where: PDR= Planned detection risk

AAR= Acceptable audit risk

IR= Inherent risk

CR= Control risk

AUDIT RISK MODEL FOR PLANNING

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AUDIT RISK MODEL FOR PLANNING


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The degree to which external users rely on

the statements;

The likelihood that a client will have financial

difficulties after the audit report is issued;

The auditors evaluation of managements

integrity.

FACTORS AFFECTINGACCEPTABLE AUDIT RISK

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Nature of Clients Business

Industry practices Non-routine transactions Makeup of the population

Culture Related parties Factors related to fraudulent financial reporting

Factors related to misappropriation of assets

Audit Experience Prior audit results Initial vs. repeat engagement Audit judgment required to correctly

record balances and transactions

FACTORS AFFECTING INHERENT RISK


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1. To obtain sufficient appropriate evidencefor the circumstances;

2. To help keep audit costs reasonable;

3. To avoid misunderstanding with the client.

REASONS FOR PLANNING

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1. Client acceptance and continuance;

2. Identify clients reasons for audit;

3. Obtain an understanding with the client;

4. Develop overall audit strategy.

INITIAL AUDIT PLANNING

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New client investigations If previously audited, the new auditor is

required to communicate with thepredecessor auditor

Client permission required

Continuing clients

Annual evaluations whether to continuebased on issues, fees, and client integrity

CLIENT ACCEPTANCE & CONTINUANCE

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Two major factors affecting acceptable risk Likely statement users Intended uses of the statements

Likely to accumulate more evidence forcompanies that are: Publicly held;

Have extreme indebtedness; Likely to be sold.

IDENTIFY REASONS FOR THE AUDIT

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Engagement terms should be understoodbetween CPA and client.

Standards require an engagement letter

describing: Objectives; Responsibilities of auditor & management

schedules and fees; Informs client that auditor cant guarantee

all acts of fraud will be discovered; See figure 8-2.

OBTAINING AN UNDERSTANDINGWITH THE CLIENT

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Preliminary audit strategy should consider Clients business and industry; Material misstatement risk areas; Number of client locations; Past effectiveness of controls.

Preliminary strategy helps auditordetermine resource requirements and

staffing: Staff continuity; Need for specialists.

DEVELOP OVERALL AUDIT STRATEGY

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UNDERSTANDING OF THE CLIENTSBUSINESS & INDUSTRY

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Client business risk is the risk that the clientwill fail to achieve its objectives.

What is the auditors primary concern? Material misstatements in the financial statements due to client business risk

ASSESS CLIENT BUSINESS RISK

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CLIENTS BUSINESS, RISK, AND RISKOF MATERIAL MISSTATEMENT

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Comparison of client ratios to industry orcompetitor benchmarks provides an indicationof the companys performance.

Preliminary tests can reveal unusual changes inratios.

PRELIMINARY ANALYTICAL PROCEDURES

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E.G. OF PLANNING ANALYTICAL PROCEDURES

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Compare client data with:

1. Industry data

2. Similar prior-period data

3. Client-determined expected results4. Auditor-determined expected results

5. Expected results using nonfinancial data.

TYPES OF ANALYTICAL PROCEDURES

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Set materiality and assess

acceptable audit risk

and inherent risk; Understand internal control

and assess control risk;

Gather information to assess fraud risks;

Develop overall audit plan and audit program.

PLANNING AN AUDIT AND DESIGNINGAN AUDIT APPROACH

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END OF CHAPTER 8.

THANK YOU!

chap 8&9 - audit planning & risk

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