Planning and Analytical Procedures Chapter 8

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Planning and Analytical Procedures Chapter 8

  1. 1. Planning and Analytical Procedures Chapter 8
  2. 2. Planning Considerations <ul><li>Acceptable Audit Risk </li></ul><ul><li>Knowledge of Industry </li></ul><ul><li>Inherent Risk </li></ul><ul><li>Client Acceptance </li></ul>
  3. 3. Client Acceptance <ul><li>Standing in the community </li></ul><ul><li>Financial stability </li></ul><ul><li>Need for audit </li></ul><ul><li>SAS 84: Communications with Predecessor Auditor </li></ul><ul><li>Continuing clients should be scrutinized as well </li></ul>
  4. 4. Client Engagement Letters <ul><li>SAS 83: Must document agreement. Not required to be a letter </li></ul><ul><ul><li>1136 Tenants </li></ul></ul><ul><li>Specify services provided, outcomes </li></ul><ul><li>Outline responsibilities on both sides </li></ul><ul><li>Timelines and budget </li></ul><ul><li>Specify IC if SarbOx applies </li></ul><ul><li>Review example. P. 198 </li></ul>
  5. 5. Staff Assignment <ul><li>GAAS: Adequate training and proficiency </li></ul><ul><li>Necessary to develop budget and fee </li></ul><ul><li>Outside specialists </li></ul><ul><li>Internal auditors </li></ul>
  6. 6. Understanding the Industry <ul><li>Key players in the industry </li></ul><ul><li>Common transactions and structures </li></ul><ul><li>Industry news </li></ul><ul><li>Industry ratios </li></ul><ul><li>Volatility </li></ul><ul><li>Diversification </li></ul>
  7. 7. Understanding the Client <ul><li>Use of IT and EC/B2B </li></ul><ul><li>Major customers and suppliers </li></ul><ul><li>Global operations or joint ventures </li></ul><ul><li>Key personnel </li></ul><ul><li>Tour plants and offices </li></ul><ul><li>Identify related parties </li></ul><ul><li>Objectives and strategies of client </li></ul><ul><li>Management incentives </li></ul>
  8. 8. Corporate Governance <ul><li>Organizational structure </li></ul><ul><li>Corporate charter and bylaws </li></ul><ul><li>Code of Ethics </li></ul><ul><ul><li>Do they have one? If not, why not? </li></ul></ul><ul><ul><li>To whom does it apply? </li></ul></ul><ul><li>Activities of Board of Directors </li></ul><ul><ul><li>Minutes of meetings </li></ul></ul><ul><ul><li>Audit committee </li></ul></ul><ul><li>Whistleblowing mechanisms </li></ul>
  9. 9. Identification of Key Risks <ul><li>Business risks </li></ul><ul><li>Mitigating controls </li></ul><ul><li>Management is primary source of info </li></ul><ul><ul><li>Must design disclosure controls to keep alert to risks </li></ul></ul><ul><li>SarbOx: Management must disclose key risks to auditors </li></ul>
  10. 10. Analytical Procedures <ul><li>Liquidity ratios </li></ul><ul><ul><li>Cash ratio </li></ul></ul><ul><ul><li>Quick / acid-test ratio </li></ul></ul><ul><ul><li>Current ratio </li></ul></ul><ul><ul><li>A/R turnover or days in receivables </li></ul></ul><ul><ul><li>Inventory turnover or days sales in inventory </li></ul></ul><ul><li>Solvency ratios </li></ul><ul><ul><li>Debt to equity </li></ul></ul><ul><ul><li>Debt to assets </li></ul></ul><ul><ul><li>Times interest earned </li></ul></ul>
  11. 11. More Analytics <ul><li>Profitability ratios </li></ul><ul><ul><li>Gross margin </li></ul></ul><ul><ul><li>Operating margin </li></ul></ul><ul><ul><li>Profit margin </li></ul></ul><ul><ul><li>ROA </li></ul></ul><ul><ul><li>ROE </li></ul></ul><ul><li>Vertical analysis </li></ul><ul><li>Trend analysis </li></ul>
  12. 12. AP Comparisons <ul><li>Compare to industry </li></ul><ul><li>Compare to last year </li></ul><ul><li>Compare to client expectations </li></ul><ul><li>Compare to auditor expectations </li></ul><ul><li>Consider non-financial information </li></ul><ul><li>Let’s try! ANHEUSER-BUSCH_10-K.xls </li></ul>

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