1、Audit Planning andAnalytical Procedures,Chapter 7,Learning Objective 1,Discuss why adequate auditplanning is essential.,Planning,The work is to be adequately planned, andassistants, if any, are to be properly supervised.,Acceptable audit risk,Inherent risk,Planning an Audit andDesigning an Approach,
2、Accept client andperform initialaudit planning,Understand theclients businessand industry,Assess clientbusiness risk,Perform preliminaryanalytical procedures,Planning an Audit andDesigning an Approach,Set materiality, andassess acceptable auditrisk and inherent risk,Develop overallaudit plan andaudi
3、t program,Understand internalcontrol and assesscontrol risk,Learning Objective 2,Make client acceptancedecisions and performinitial audit planning.,Initial Audit Planning,Client acceptance and continuation,Identify clients reasons for audit.,Obtain an understanding with the client.,Select staff for
4、the engagement.,Learning Objective 3,Gain an understanding of theclients business and industry.,Understanding of the Clients Business and Industry,What are some factors that have increasedthe importance of understanding theclients business and industry?,Globaloperations,Informationtechnology,Humanca
5、pital,Understanding of the Clients Business and Industry,Understand Clients Business and Industry,Industry and External Environment,Business Operations and Processes,Management and Governance,Objectives and Strategies,Measurement and Performance,Industry and External Environment,What are some reason
6、s for obtaining an understanding of the clients industry and external environment?,Risks associated with specific industries,Inherent risks common to all clients in certain industries,Unique accounting requirements,Business Operationsand Processes,Factors the auditor should understand:, major source
7、s of revenue, sources of revenue, key customers and suppliers, sources of financing, information about related parties, ability to obtain financing,Management and Governance,Management establishes the strategies andprocesses followed by the clients business.,Governance includes the clients organizat
8、ionalstructure, as well as the activities of the boardof directors and the audit committee.,Corporate charter and bylaws,Minutes of meetings,Client Objectivesand Strategies,Strategies are approaches followed by theentity to achieve organizational objectives.,Auditors should understand client objecti
9、ves.,Effectivenessand efficiencyof operations,Financialreportingreliability,Compliancewith laws andregulations,Measurement and Performance,The clients performance measurement systemincludes key performance indicators. Examples:,Performance measurement includes ratio analysisand benchmarking against
10、key competitors., market share, sales per employee, unit sales growth, Web site visitors, same-store sales, sales/square foot,Learning Objective 4,Assess client business risk.,Assess Client Business Risk,Client business risk is the risk that theclient will fail to achieve its objectives.,What is the
11、 auditors primary concern?, material misstatement of the financialstatements due to client business risk,The Clients Business, Risk, andAuditors Risk Assessment,Industry and External Environment,Business Operations and Processes,Management and Governance,Objectives and Strategies,Measurement and Per
12、formance,Understand ClientsBusiness and Industry,Assess ClientBusiness Risk,Assess Risk ofMaterial Misstatements,Learning Objective 5,Perform preliminaryanalytical procedures.,Preliminary Analytical Procedures,Comparison of client ratios to industryor competitor benchmarks provides anindication of t
13、he companys performance.,Analytical procedures are also an importantpart of testing throughout the audit.,Examples of PlanningAnalytical Procedures,Key Parts of Planning,Accept Client and PerformInitial Planning,Key Parts of Planning,Understand the ClientsBusiness and Industry,Key Parts of Planning,
14、Assess ClientBusiness Risk,Evaluate managementbusiness controlsaffecting business risk,Key Parts of Planning,Perform PreliminaryAnalytical Procedures,Summary of the Purposesof Auditing Planning,A major purpose is to gain an understanding of the clients business and industry.,Learning Objective 6,Sta
15、te the purposes of analyticalprocedures and the timingof each purpose.,Analytical Procedures,Analytical procedures use comparisons andrelationships to assess whether accountbalances or other data appear reasonable.,SAS 56 emphasizes the expectationsdeveloped by the auditor.,Timing and Purpose ofAnal
16、ytical Procedures,Timing and Purpose ofAnalytical Procedures,TestingPhase,Purpose,Understand clientsindustry and business,Timing and Purpose ofAnalytical Procedures,(Required)Completion Phase,Purpose,Understand clientsindustry and business,Learning Objective 7,Select the most appropriateanalytical p
17、rocedure fromamong the five major types.,Five Major Types ofAnalytical Procedures,Compare client and industry data.Compare client data with similar prior-period data.Compare client data with client-determined expected results.Compare client data with auditor-determined expected results.Compare clien
18、t data with expected results, using nonfinancial data.,Compare Clientand Industry Data,Client Industry2002200120022001Inventory turnover 3.4 3.5 3.9 3.4Gross margin percent26.3%26.4%27.3%26.2%,Compare Client Data WithSimilar Prior-period Data,2002 2001 (000,000) % of (000,000) % of PreliminaryNet Sa
19、les Audited Net SalesNet sales143100131100Cost of goods sold103 72 95 72Gross profit 40 28 36 28S & A 32 22 30 23Other 4 3 3 3Net income 4 3 3 2,Learning Objective 8,Compute commonfinancial ratios.,Common Financial Ratios,Short-term debt-paying ability,Liquidity activity ratios,Ability to meet long-
20、term debt obligations,Profitability ratios,Short-termDebt-paying Ability,Cash ratio:(Cash + Marketable securities) Current liabilities,Quick ratio:(Cash + Marketable securities+ Net accounts receivable) Current liabilities,Current ratio:Current assets Current liabilities,Liquidity Activity Ratios,Ac
21、counts receivable turnover:Net sales Average gross receivables,Days to collect receivables:365 days Accounts receivable turnover,Inventory turnover:Cost of goods sold Average inventory,Liquidity Activity Ratios,Days to sell inventory:365 days inventory turnover,Ability to Meet Long-termDebt Obligati
22、on,Debt to equity:Total liabilities Total equity,Times interest earned:Operating income Interest expense,Summary of Analytical Procedures,They involve the computation of ratiosand other comparisons of recordedamounts to auditor expectations.,They are used in planning to understand the clients business and industry.,They are used throughout the audit to identifypossible misstatements, reduce detailed tests,and to assess going-concern issues.,End of Chapter 7,
