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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.

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Modern Auditing: Assurance Services and the Integrity of Financial Reporting, 8 th Edition

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Modern Auditing:

Assurance Services and the Integrity of Financial Reporting, 8th 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


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Chapter 7 Overview


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Client Acceptance and Retention


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Evaluating the Integrity of Management

  • Communicate with the Predecessor Auditor

  • Make Inquiries of Other Third Parties

  • Review Previous Experience with Existing Clients


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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


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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


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Evaluating Independence

  • Identify Circumstances Impairing Independence

  • Identify Professional Staff Financial and Business Relationships

  • Identify Conflicts of Interest with Other Clients


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Making the Decision to Accept or Decline the Audit

  • Integrity of Management

  • Special Circumstances and Unusual Risks

  • Competence Issues

  • Independence Issues


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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


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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


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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


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Study Break

  • While evaluating the integrity of management, which would be considered to be the least useful?

  • Inquiries of management

  • Communications with preceding auditor

  • Inquiries of other third parties

  • Evaluate previous experiences with client

    A. Inquiries of management


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Study Break

2. Outside specialists include all of the following except:

  • Appraisers

  • Internal auditors

  • Actuaries

  • Attorneys

    B. Internal auditors


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Risk Assessment Procedures


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Understanding the Entity and Its Environment


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Industry, Regulatory, and Other External Factors

  • Industry Conditions

  • Regulatory Environment

  • Other External Factors Affecting the Entity’s Business


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The Nature of the Entity and Accounting Policies

  • Business Operations

  • Investing Activities

  • Financing Activities

  • Financial Reporting


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Entity’s Objectives, Strategies, and Related Business Risks

  • Entity’s Objectives

  • Entity’s Strategies

  • Business Risks

  • Effects of Implementing a Strategy


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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


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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.

  • Business Operations

  • Investing Activities

  • Financing Activities

  • Financial Reporting

    D. Financial Reporting


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Study Break

4. ______ are the operational approaches by which management intends to achieve its objectives.

  • Entity’s objectives

  • Entity’s strategies

  • Business risks

  • Financing activities

    B. Entity’s strategies


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