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,MODERN AUDITING 7th Edition,William C. BoyntonCalifornia Polytechnic State University at San Luis ObispoRaymond N. JohnsonPortland State UniversityWalter G. KellUniversity of Michigan,Developed by:Dr. Raymond N. Johnson, CPAGregory K. Lowry, MBA, CPA,John Wiley & Sons, Inc.,CHAPTER 7ACCEPTING THE ENGAGEMENT AND PLANNING THE AUDIT,Overview of a Financial Statement AuditClient Acceptance and RetentionPlanning the AuditObtaining an Understanding of the Clients Business and IndustryPerforming Analytical Procedures,Overview of a Financial Statement Audit,4 Phases of an Audit1. Client Acceptance and Retention2. Planning the Audit3. Performing Audit Tests4. Reporting the Findings,Steps in Accepting an Audit EngagementFigure 7-1,Management Integrity,Communication with the Predecessor AuditorMake inquiries of other third partiesReview previous experience with existing clientsKnowledge of critical success factors & competitionClient background checksPrevious bankruptcyPrevious convictionsSuspected ties to organized crimeIndustry experience,Identify Special Circumstances and Unusual Risks,Focus on the auditors business risksIdentify intended users of audited statementsPurchase and sale of businessAssess prospective clients legal and financial stabilityClients need for capitalIdentify scope limitationsEvaluate the entitys financial reporting systems and auditabilityInadequate internal controls,Assess Competence to Perform the Audit,Services desiredIdentify the audit teamNeed for consultation and use of specialistsTrend in industry specialization,Evaluating Independence,Evaluate whether there are any circumstance that would impair independence,Decision to Accept,80s: Accept clients as route to partnership, but not as cognizant of risks90s: Clean up client list during good times with a focus on growth oriented clients,Steps in Accepting an Audit EngagementFigure 7-1,Page 241,Key Steps in Planning the AuditFigure 7-3,Chapter 7,Chapter 7,Chapter 8,Chapter 8,Chapter 8,Chapter 9,Overview of Business CycleFigure 7-4,Consider Livent,Theater company producing shows like Phantom of the Opera, Showboat, etc.Financial statement misstatements:Capitalized cost of shows as pre-production costsRevenue recognition for tickets given awayCost structureHeavy fixed costsPredictable costsNeed for ticket revenues and cash flows,Overview of Business CycleFigure 7-4,Understand and Quantify,Understand, Quantify,and Correlate with Outcomes,Understanding the Business and Industry,The clients business risks are strongly correlated with the auditor audit risk.Do audit tests ensure that the entitys outcomes associated with business risks are fairly presented in the financial statements?,Understanding the Clients BusinessFigure 7-5,Understanding the Clients BusinessFigure 7-5,Understanding the Clients BusinessFigure 7-5,Understanding the Clients BusinessFigure 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 procedures2. In the testing phase, as a substantive test to obtain evidential matter about particular assertions related to account balances or classes of transactions3. 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 made2. Develop expectations3. Perform the calculations/comparisons4. Analyze data and identify significant differences5. Investigate significant unexpected differences6. Determine effects on audit planning,Performing Analytical Procedures,New Technology, Inc.,Evaluate the data presented on pp 260-261.Develop your own expectationsCompare company data with expectationsIdentify issues that need audit attention.,CHAPTER 7 ACCEPTING AND PLANNING THE AUDIT ENGAGEMENT,Copyright,Copyright 2001 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make backup cop