Chapter 8 Audit Planning and Analytical Procedures PLANNING Why auditor should properly plan engagements: a. To enable the auditor to obtain sufficient appropriate evidence for the circumstances b. To help keep audit costs reasonable c. To avoid misunderstanding with the clients Acceptable Audit Risk is a measure of how willing the auditor is to accept that the F/S may be materially misstated after the audit is completed and an unqualified opinion has been issued. When auditor decides on a lower acceptable audit risk, it means that the auditor wants to be more certain that the F/S are not materially misstated. *risk can not be eliminated because not all of evidence being examine. Inherent Risk is a measure of the auditor’s assessment of the likelihood that there are material misstatements in account balance before considering the effectiveness of internal control. If the auditor concludes that there is a high likelihood of material misstatement in A/R due to changing of economic conditions, the auditor concludes that inherent risk for A/R is high. Planning an Audit and Designing an Audit Approach I. Accept Client and Perform Initial Audit Planning a. The auditor decide whether to accept a new client or continue serving an existing one. b. The auditor identifies why the client wants or needs an audit c. To avoid misunderstanding, the auditor obtains an understanding with the client about the terms of engagement. d. The auditor develops an overall strategy for the audit, including engagement atffing and any required audit specialists New Client Investigation Continuing Clients Identify Client’s Reasons for Audit Obtain an understanding with the client Develop Overall audit strategy Select staff for engagement Evaluate need for outside specialist
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Understand the Client’s Business and Industry Why is it important? General Standard: “The auditor must obtain a sufficient understanding of the entity and its environment, including its internal control , to assess the risk of material misstatements of the F/S whether due to error or fraud and to design the nature, timing and extent of further audit procedures.” The nature of the client’s business and industry affects client business risk and the risk of material misstatements in the F/S Recent significant declines in economic conditions around the world are likely to significantly increase Information technology connects client companies with major costumers and suppliers. As a result, the auditor should gather information about the costumers and suppliers Client have expanded operations globally; joint venture & strategic alliances Information technology affect the internal client processes, improving the quality and timeliness of accounting information
Sumary Audit-UAS |By Siceli Wulandari
The increased importance of human capital and other intangible assets ahs increased accounting complexity and the importances of management judgment and estimates Many clients may have invested in complex F/S, sech as collateralized debt obligations or unusual mortgage backed securities, which have little value and require complex accounting treatments Understanding of client’s industry and external environment; Risks associated with specific industries may affect the auditor’s assessment of client business risk and acceptable audit risk-and may even influence auditors against accepting engagements in riskier industries, such as the financial service and health insurance industry. Certain inherent risks are typically common to all clients in certain industries. Familiarity with those risks aids the auditor in assessing their relevance to the client. E.g. : include potential inventory obsolesce in the fashion industry, A/R collection inherent risk in the consumer loan industry, and reserve for loss inherent risk in the casualty insurance industry Many industries have unique accounting requirements that the auditor must understand to...
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