Flashcards in Ch 8 - Audit Planning and Analytical Procedures Deck (35):
A measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued.
Acceptable audit risk
Overall approach to the audit that considers the nature of the client, risk of significant misstatements, and other factors such as the number of client locations and past effectiveness of client controls.
written records of the client's expectations for the period; a comparison of budgets with actual results may indicate whether or not misstatements are likely.
The risk that the client will fail to achieve its objectives related to (1) reliability of financial reporting, (2) effectiveness and efficiency of operations, and (3) compliance with laws and regulations.
Client business risk
the official record of the meetings of a corporations board of directors and stockholders, in which corporate issues such as declaration of dividends and the approval of contracts are documented.
an agreement between the CPA firm and the client as to the terms of the engagement for the conduct of the audit and related services.
a measure of the auditor's assessment of the likelihood that there are material misstatements in a segment before considering the effectiveness of internal control
involves deciding whether to accept or continue doing the audit for the client, identifying the client's reasons for the audit, obtaining an engagement letter, and developing an audit strategy.
Initial audit planning
affiliated company, principal owner of the client company, or an other party with which the client deals, where one of the parties can influence the management or operating policies of the other.
any transaction between the client and a related party.
Related party transactions
What are three main reasons for audit planning?
1) Enable auditor to obtain sufficient appropriate evidence
2) Help keep audit costs reasonable
3) Avoid misunderstandings with the client
What are the eight major parts of audit planning?
1) Accept client and perform initial audit planning
2) Understand the client's business and industry
3) Assess client business risk
4) Perform preliminary analytical procedures
5) Set materiality and assess acceptable audit risk and inherent risk
6) Understand internal control and assess control risk
7) Gather information to assess fraud risks
8) Develop overall audit strategy and audit program
Audit risk and inherent risk influence the _____ of evidence that will need to be collected and the _____ level of staff assigned to the engagement.
What two risks significantly affect the conduct and cost of audits?
1) Audit risk
2) Inherent risk
When the auditor decides on a lower acceptable audit risk, it means that the auditor wants to be (more, less) certain that the financial statements are not materially misstated.
What are four aspects of initial audit planning?
1) Decide to accept or continue client
2) Identify reasons for audit
3) Engagement letter
4) Develop overall strategy
For prospective clients that have previously been audited by another CPA firm, the new (successor) auditor is required by auditing standards to ___________.
communicate with the predecessor auditor.
For what three reasons might an auditor obtain more evidence?
if the company is
1) a public company
2) has extensive indebtedness
3) is being sold in the near future
What are the four major components of PCAOP's Audit Engagement Letter?
• The objective of the audit
• The auditor’s responsibilities
• What is included in the audit
• Management’s responsibilities
For public companies, who is responsible for hiring the auditor?
The audit committee
What are three reasons to understand a client’s industry and external environment?
1. Risk associated with specific industries affect the auditor’s decisions
2. to gain understanding of inherent risk in a client’s business and industry
3. unique accounting requirements per the client’s business and industry
Tells the ability of a company to pay off current liabilities with cash.
Tells the ability of a company to pay off current liabilities very quickly.
Tells the ability of a company to pay off current liabilities within a year.
the auditor uses trends in this ratio to assess the reasonableness of the allowance for uncollectible accounts.
Accounts Receivable Turnover
Accounts Receivable Turnover expressed in number of days. Tells how long it takes for a company to convert A/R to cash.
Days to Collect Receivables
Auditors use trends in this ratio to identify potential inventory obsolescence.
Inventory Turnover expressed in number of days.
Days to Sell Inventory
The extent of the use of debt in financing a company.
Debt to Equity
Shows whether a company can comfortably make its interest payments.
Times Interest Earned
Shows profitability per share of common stock.
Earnings Per Share
Shows the percentage of sales available to pay other expenses after deducting COGS.
Gross Profit Percentage
Shows the percentage of sales available after deducting the cost of the product and operating expenses.
Measure of overall profitability.
Return on Assets