1. MMOODDEERRNN
AAUUDDIITTIINNGG 77tthh
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UUnniivveerrssiittyy aatt SSaann LLuuiiss OObbiissppoo
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Developed by:
Dr. Raymond N. Johnson, CPA
Gregory K. Lowry, MBA, CPA John Wiley & Sons, Inc.
2. CCHHAAPPTTEERR 77
CCHHAAPPTTEERR 77
AACCCCEEPPTTIINNGG TTHHEE EENNGGAAGGEEMMEENNTT AANNDD
AACCCCEEPPTTIINNGG TTHHEE EENNGGAAGGEEMMEENNTT AANNDD
PPLLAANNNNIINNGG TTHHEE AAUUDDIITT
PPLLAANNNNIINNGG TTHHEE AAUUDDIITT
Overview of a Financial Statement Audit
Client Acceptance and Retention
Planning the Audit
Obtaining an Understanding of the
Client’s Business and Industry
Performing Analytical Procedures
3. OOvveerrvviieeww ooff aa FFiinnaanncciiaall
SSttaatteemmeenntt AAuuddiitt
4 Phases of an Audit
1. Client Acceptance and Retention
2. Planning the Audit
3. Performing Audit Tests
4. Reporting the Findings
5. Management IInntteeggrriittyy
• Communication with the Predecessor Auditor
• Make inquiries of other third parties
• Review previous experience with existing clients
– Knowledge of critical success factors competition
• Client background checks
– Previous bankruptcy
– Previous convictions
– Suspected ties to organized crime
• Industry experience
6. Identify Special
Circumstances and Unusual
Risks
Focus on the auditor’s business risks
• Identify intended users of audited statements
– Purchase and sale of business
• Assess prospective client’s legal and financial stability
– Client’s need for capital
• Identify scope limitations
• Evaluate the entity’s financial reporting systems and
auditability
– Inadequate internal controls
7. Assess Competence to
Perform the Audit
• Services desired
• Identify the audit team
• Need for consultation and use of specialists
• Trend in industry specialization
9. DDeecciissiioonn ttoo AAcccceepptt
• 80’s: Accept clients as route to partnership, but
not as cognizant of risks
• 90’s: Clean up client list during good times with
a focus on growth oriented clients
13. CCoonnssiiddeerr LLiivveenntt
• Theater company producing shows like Phantom
of the Opera, Showboat, etc.
• Financial statement misstatements:
– Capitalized cost of shows as pre-production costs
– Revenue recognition for tickets given away
• Cost structure
– Heavy fixed costs
– Predictable costs
• Need for ticket revenues and cash flows
14. OOvveerrvviieeww ooff BBuussiinneessss CCyyccllee
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FFiigguurree 77--44
FFiigguurree 77--44
Understand and
Quantify
Understand,
Quantify,
and Correlate with Outcomes
15. Understanding the
Business and Industry
• The clients business risks are strongly correlated
with the auditor audit risk.
• Do audit tests ensure that the entity’s outcomes
associated with business risks are fairly
presented in the financial statements?
16. UUnnddeerrssttaannddiinngg tthhee CClliieenntt’’ss BBuussiinneessss
Understanding tthhee CClliieenntt’’ss BBuussiinneessss
FFiigguurree 77--55
FFiigguurree 77--55
Key Issues What to Understand
Senior Management Does management depend on one or a few key individuals?
How experienced is the entity’s management?
What is management’s attitude toward accepting risks?
How does management delegate authority and responsibility?
What is management’s reputation for integrity and business
ethics?
Management Goals What are management’s primary goals?
and Objectives Obtaining additional market share?
Growth in sales?
Growth in profits?
Growth in operating cash flows?
Growth in market valuation?
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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
22. NNeeww TTeecchhnnoollooggyy,, IInncc..
• Evaluate the data presented on pp 260-261.
• Develop your own expectations
• Compare company data with expectations
• Identify issues that need audit attention.
24. CCCCooooppppyyyyrrrriiiigggghhhhtttt
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
copies for his/her own use only and not for
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caused by the use of these programs or from the
use of the information contained herein.
