Modern Auditing Assurance Services and the Integrity of

Modern Auditing: Assurance Services and the Integrity of Financial Reporting, 8 th Edition William C. Boynton California Polytechnic State University at San Luis Obispo Raymond N. Johnson Portland State University Chapter 7 – Accepting the Engagement and Planning the Audit

Chapter 7 Overview

Client Acceptance and Retention

Evaluating the Integrity of Management • Communicate with the Predecessor Auditor • Make Inquiries of Other Third Parties • Review Previous Experience with Existing Clients

Identifying Special Circumstances and Unusual Risks • Identify Intended Users of Audited Statements • Assess Prospective Client’s Legal and Financial Stability • Identify Scope Limitations • Evaluate the Entity’s Financial Reporting Systems and Auditability

Assessing Competence to Perform the Audit • Services Desired • Identify the Audit Team – Partner – Manager(s) – Senior(s) – Staff Assistants • Consider Need for Consultation and Specialists

Evaluating Independence • Identify Circumstances Impairing Independence • Identify Professional Staff Financial and Business Relationships • Identify Conflicts of Interest with Other Clients

Making the Decision to Accept or Decline the Audit • Integrity of Management • Special Circumstances and Unusual Risks • Competence Issues • Independence Issues

Preparing the Engagement Letter • Clear identification of entity and financial statements to be audited • Objective or purpose of the audit • Reference to professional standards to be followed • Explain nature and scope of audit and auditor’s responsibilities

Preparing the Engagement Letter • Statement that not all material fraud may be detected • Reminder of management responsibility for financial statements and internal controls • Indicate potential request for written representations • Describe any auxiliary services to be provided

Preparing the Engagement Letter • Basis on which fees will be computed and billing arrangements • Request to confirm terms of engagement by signing and returning a copy to the auditor

Study Break 1. While evaluating the integrity of management, which would be considered to be the least useful? A. Inquiries of management B. Communications with preceding auditor C. Inquiries of other third parties D. Evaluate previous experiences with client A. Inquiries of management

Study Break 2. Outside specialists include all of the following except: A. Appraisers B. Internal auditors C. Actuaries D. Attorneys B. Internal auditors

Risk Assessment Procedures

Understanding the Entity and Its Environment

Industry, Regulatory, and Other External Factors • Industry Conditions • Regulatory Environment • Other External Factors Affecting the Entity’s Business

The Nature of the Entity and Accounting Policies • Business Operations • Investing Activities • Financial Reporting

Entity’s Objectives, Strategies, and Related Business Risks • Entity’s Objectives • Entity’s Strategies • Business Risks • Effects of Implementing a Strategy

Measurement and Review of the Entity’s Financial Performance • Ratios and Operating Statistics • Performance Indicators • Employee Performance Measures and Incentive Compensation Plans • Industry Trends • Forecasts, Budgets, and Variance Analysis • Analyst Reports and Credit Rating Reports

Study Break 3. In order to understand the entity’s ______, we must understand matters such as the accounting principles, revenue recognition practices, and financial statement presentation and disclosure. A. Business Operations B. Investing Activities C. Financing Activities D. Financial Reporting

Study Break 4. ______ are the operational approaches by which management intends to achieve its objectives. A. Entity’s objectives B. Entity’s strategies C. Business risks D. Financing activities B. Entity’s strategies