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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, 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

evaluating the integrity of management
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
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
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
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
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
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 letter10
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 letter11
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
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

industry regulatory and other external factors
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
The Nature of the Entity and Accounting Policies
  • Business Operations
  • Investing Activities
  • Financing Activities
  • Financial Reporting
entity s objectives strategies and related business risks
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
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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