University:
California State University, Northridge
Course:
ACCT 460 | Auditing Principles and Analytics
Academic year:

2013
Views:

48

Pages:

20
Author:

xxxkimerraxxxvur

Audit Planning and Analytical Procedures Chapter 8 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 auditor’s primary concern?  Material misstatements in the financial statements due to client business risk Client’s Business, Risk, and Risk of Material Misstatement Understand client’s business and industry Assess client business risk Industry and external environment Business operations and processes Management and governance Objectives and strategies Assess risk of material misstatements Measurement and performance Sarbanes-Oxley Act The Sarbanes-Oxley Act requires that management certify it has designed disclosure controls and procedures to ensure that material information about business risks is made known to them. It also requires that management certify it has informed the auditor and audit committee of any significant deficiencies in internal control. Learning Objective 5 Perform preliminary analytical procedures. Preliminary Analytical Procedures Comparison of client ratios to industry or competitor benchmarks provides an indication of the company’s performance. Preliminary tests can reveal unusual changes in ratios. Examples of Planning Analytical Procedures Selected Ratios Client Industry Short-term debt-paying ability: Current ratio 3.86 5.20 Liquidity activity ratio: Inventory turnover 3.36 5.20 Ability to meet long-term obligations: Debt to equity 1.73 2.51 Profitability ratio: Profit margin 0.07 0.05 Summary of the Parts of Auditing Planning A major purpose is to gain an understanding of the client’s business and industry. Key Parts of Planning Accept client and perform initial planning  New client acceptance and continuance  Identify client’s reasons for audit  Obtain an understanding with client  Staff the engagement Key Parts of Planning Understand the client’s business and industry  Understand client’s industry and external environment  Understand client’s operations, strategies, and performance system Key Parts of Planning  Assess client business risk  Evaluate management controls affecting business risk  Assess risk of material misstatements Key Parts of Planning Perform preliminary analytical procedures Learning Objective 6 State the purposes of analytical procedures and the timing of each purpose. Analytical Procedures AU 329 emphasizes the expectations developed by the auditor. 1. Required in the planning phase 2. Often done during the testing phase 3. Required during the completion phase Timing and Purposes of Analytical Procedures Purpose (Required) Planning Phase Understand client’s industry and business Primary purpose Assess going concern Secondary purpose Indicate possible misstatements (attention directing) Reduce detailed tests Primary purpose Testing Phase (Required) Completion Phase Secondary purpose Secondary Primary purpose purpose Secondary Primary purpose purpose Learning Objective 7 Select the most appropriate analytical procedure from among the five major types. Five Types of Analytical Procedures Compare client data with: 1. Industry data 2. Similar prior-period data 3. Client-determined expected results 4. Auditor-determined expected results 5. Expected results using nonfinancial data. Compare Client and Industry Data Client Inventory turnover Gross margin Industry 2009 2008 2009 2008 3.4 26.3% 3.5 26.4% 3.9 27.3% 3.4 26.2% Compare Client Data with Similar Prior Period Data 2009 Net sales Cost of goods sold Gross profit Selling expense Administrative expense Other Earnings before taxes Income taxes Net income (000) Prelim. % of Net sales $143,086 103,241 $ 39,845 14,810 17,665 1,689 $ 5,681 1,747 $ 3,934 100.0 72.1 27.9 10.3 12.4 1.2 4.0 1.2 2.8 2008 (000) % of Prelim. Net sales $131,226 94,876 $ 36,350 12,899 16,757 2,035 $ 4,659 1,465 $ 3,194 100.0 72.3 27.7 9.8 12.8 1.6 3.5 1.1 2.4