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Click to edit Master title style,Click to edit Master text styles,Second level,Third level,Fourth level,Fifth level,7 -,42,2003 Prentice Hall Business Publishing,Essentials of Auditing 1/e,Arens/Elder/Beasley,Audit Planning andAnalytical Procedures,Chapter 7,Learning Objective 1,Discuss why adequate audit,planning is essential.,Planning,The work is to be adequately planned, and,assistants, if any, are to be properly supervised.,Acceptable audit risk,Inherent risk,Planning an Audit andDesigning an Approach,Accept client and,perform initial,audit planning,Understand the,clients business,and industry,Assess client,business risk,Perform preliminary,analytical procedures,Planning an Audit andDesigning an Approach,Set materiality, and,assess acceptable audit,risk and inherent risk,Develop overall,audit plan and,audit program,Understand internal,control and assess,control risk,Learning Objective 2,Make client acceptance,decisions and perform,initial audit planning.,Initial Audit Planning,Client acceptance and continuation,Identify clients reasons for audit.,Obtain an understanding with the client.,Select staff for the engagement.,Learning Objective 3,Gain an understanding of the,clients business and industry.,Understanding of the Clients Business and Industry,What are some factors that have increased,the importance of understanding the,clients business and industry?,Global,operations,Information,technology,Human,capital,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 reasons 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 sources 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 and,processes followed by the clients business.,Governance includes the clients organizational,structure, as well as the activities of the board,of directors and the audit committee.,Corporate charter and bylaws,Minutes of meetings,Client Objectivesand Strategies,Strategies are approaches followed by the,entity to achieve organizational objectives.,Auditors should understand client objectives.,Effectiveness,and efficiency,of operations,Financial,reporting,reliability,Compliance,with laws and,regulations,Measurement and Performance,The clients performance measurement system,includes key performance indicators. Examples:,Performance measurement includes ratio analysis,and benchmarking against 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 the,client will fail to achieve its objectives.,What is the auditors primary concern?, material misstatement of the financial,statements 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 Performance,Understand Clients,Business and Industry,Assess Client,Business Risk,Assess Risk of,Material Misstatements,Learning Objective 5,Perform preliminary,analytical procedures.,Preliminary Analytical Procedures,Comparison of client ratios to industry,or competitor benchmarks provides an,indication of the companys performance.,Analytical procedures are also an important,part of testing throughout the audit.,Examples of PlanningAnalytical Procedures,Liquidity Activity Ratio,Inventory turnover,3.46,5.20,Ability to Meet Long-Term Obligations,Debt to equity,1.73,2.51,Profitability,Return on assets,0.09,0.09,Client,Industry,Short-Term Debt-Paying Ability,Current ratio,3.86,5.20,Selected Ratios,Key Parts of Planning,Accept Client and Perform,Initial Planning,New client,acceptance and,continuance,Obtain an,understanding,with client,Identify clients,reasons for,the audit,Staff the,engagement,Key Parts of Planning,Understand the Clients,Business and Industry,Understand,clients industry,and external,environment,Understand,clients operations,strategies, and,performance system,Key Parts of Planning,Assess Client,Business Risk,Evaluate management,business controls,affecting business risk,Assess client,business risk,Assess risk,of material,misstatements,Key Parts of Planning,Perform Preliminary,Analytical Procedures,Summary of the Purposesof Auditing Planning,A major purpose is to gain an understanding,of the clients business and industry.,Learning Objective 6,State the purposes of analytical,procedures and the timing,of each purpose.,Analytical Procedures,Analytical procedures use comparisons and,relationships to assess whether account,balances or other data appear reasonable.,SAS 56 emphasizes the expectations,developed by the auditor.,Timing and Purpose ofAnalytical Procedures,(Required),Planning Phase,Purpose,Understand clients,industry and business,Primary purpose,Assess going concern,Secondary purpose,Indicate possible misstatements,(attention directing),Primary purpose,Reduce detailed tests,Secondary purpose,Timing and Purpose ofAnalytical Procedures,Testing,Phase,Purpose,Understand clients,industry and business,Assess going concern,Indicate possible misstatements,(attention directing),Secondary purpose,Reduce detailed tests,Primary purpose,Timing and Purpose ofAnalytical Procedures,(Required),Completion Phase,Purpose,Understand clients,industry and business,Assess going concern,Secondary purpose,Indicate possible misstatements,(attention directing),Primary purpose,Reduce detailed tests,Learning Objective 7,Select the most appropriate,analytical procedure from,among 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 client data with expected results, using nonfinancial data.,Compare Clientand Industry Data,Client,Industry,2002,2001,2002,2001,Inventory turnover 3.4 3.5 3.9 3.4,Gross margin percent26.3%26.4%27.3%26.2%,Compare Client Data WithSimilar Prior-period Data,2002,2001,(000,000) % of (000,000) % of,Preliminary,Net Sales,Audited,Net Sales,Net sales143100131100,Cost of goods sold,103,72,95,72,Gross profit,40,28,36,28,S & A 32 22 30 23,Other,4,3,3,3,Net income 4 3 3 2,Learning Objective 8,Compute common,financial ratios.,Common Financial Ratios,Short-term debt-paying ability,Liquidity activity ratios,Ability to meet long-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,Accounts 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 Obligation,Debt to equity:,Total liabilities Total equity,Times interest earned:,Operating income Interest expense,Summary of Analytical Procedures,They involve the computation of ratios,and other comparisons of recorded,amounts to auditor expectations.,They are used in planning to understand,the clients business and industry.,They are used throughout the audit to identify,possible misstatements, reduce detailed tests,and to assess going-concern issues.,End of Chapter 7,
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