audit planning and analytical procedures n.
Download
Skip this Video
Loading SlideShow in 5 Seconds..
Audit Planning and Analytical Procedures PowerPoint Presentation
Download Presentation
Audit Planning and Analytical Procedures

Loading in 2 Seconds...

play fullscreen
1 / 43

Audit Planning and Analytical Procedures - PowerPoint PPT Presentation


  • 107 Views
  • Uploaded on

Audit Planning and Analytical 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. Assess client

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'Audit Planning and Analytical Procedures' - roary-parsons


Download Now An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
learning objective 1
Learning Objective 1

Discuss why adequate audit

planning is essential.

planning
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 and designing an approach

Assess client

business risk

Understand the

client’s business

and industry

Perform preliminary

analytical procedures

Planning an Audit andDesigning an Approach

Accept client and

perform initial

audit planning

planning an audit and designing an approach1

Understand internal

control and assess

control risk

Develop overall

audit plan and

audit program

Planning an Audit andDesigning an Approach

Set materiality, and

assess acceptable audit

risk and inherent risk

learning objective 2
Learning Objective 2

Make client acceptance

decisions and perform

initial audit planning.

initial audit planning
Initial Audit Planning

Client acceptance and continuation

Identify client’s reasons for audit.

Obtain an understanding with the client.

Select staff for the engagement.

learning objective 3
Learning Objective 3

Gain an understanding of the

client’s business and industry.

understanding of the client s business and industry

Information

technology

Global

operations

Human

capital

Understanding of the Client’s Business and Industry

What are some factors that have increased

the importance of understanding the

client’s business and industry?

understanding of the client s business and industry1
Understanding of the Client’s Business and Industry

Understand Client’s Business and Industry

Industry and External Environment

Business Operations and Processes

Management and Governance

Objectives and Strategies

Measurement and Performance

industry and external environment
Industry and External Environment

What are some reasons for obtaining an

understanding of the client’s industry

and external environment?

Risks associated with specific industries

Inherent risks common to all

clients in certain industries

Unique accounting requirements

business operations and processes
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 and Governance

Management establishes the strategies and

processes followed by the client’s business.

Governance includes the client’s organizational

structure, as well as the activities of the board

of directors and the audit committee.

Corporate charter and bylaws

Minutes of meetings

client objectives and strategies

Financial

reporting

reliability

Effectiveness

and efficiency

of operations

Compliance

with laws and

regulations

Client Objectivesand Strategies

Strategies are approaches followed by the

entity to achieve organizational objectives.

Auditors should understand client objectives.

measurement and performance
Measurement and Performance

The client’s performance measurement system

includes key performance indicators. Examples:

– market share

– sales per employee

– unit sales growth

– Web site visitors

– same-store sales

– sales/square foot

Performance measurement includes ratio analysis

and benchmarking against key competitors.

learning objective 4
Learning Objective 4

Assess client business risk.

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 misstatement of the financial

statements due to client business risk

the client s business risk and auditor s risk assessment

Understand Client’s

Business and Industry

Assess Client

Business Risk

Assess Risk of

Material Misstatements

The Client’s Business, Risk, andAuditor’s Risk Assessment

Industry and External Environment

Business Operations and Processes

Management and Governance

Objectives and Strategies

Measurement and Performance

learning objective 5
Learning Objective 5

Perform preliminary

analytical procedures.

preliminary analytical procedures
Preliminary Analytical Procedures

Comparison of client ratios to industry

or competitor benchmarks provides an

indication of the company’s performance.

Analytical procedures are also an important

part of testing throughout the audit.

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

3.46

5.20

Ability to Meet Long-Term Obligations

Debt to equity

1.73

2.51

Profitability

Return on assets

0.09

0.09

Examples of PlanningAnalytical Procedures
key parts of planning

New client

acceptance and

continuance

Obtain an

understanding

with client

Identify client’s

reasons for

the audit

Staff the

engagement

Key Parts of Planning

Accept Client and Perform

Initial Planning

key parts of planning1

Understand

client’s industry

and external

environment

Understand

client’s operations,

strategies, and

performance system

Key Parts of Planning

Understand the Client’s

Business and Industry

key parts of planning2

Assess client

business risk

Assess risk

of material

misstatements

Evaluate management

business controls

affecting business risk

Key Parts of Planning

Assess Client

Business Risk

key parts of planning3
Key Parts of Planning

Perform Preliminary

Analytical Procedures

summary of the purposes of auditing planning
Summary of the Purposesof Auditing Planning

A major purpose is to gain an understanding

of the client’s business and industry.

learning objective 6
Learning Objective 6

State the purposes of analytical

procedures and the timing

of each purpose.

analytical procedures
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 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)

Primary purpose

Reduce detailed tests

Secondary purpose

Timing and Purpose ofAnalytical Procedures
timing and purpose of analytical procedures1

Assess going concern

Indicate possible misstatements

(attention directing)

Secondary purpose

Reduce detailed tests

Primary purpose

Timing and Purpose ofAnalytical Procedures

Purpose

Testing

Phase

Understand client’s

industry and business

timing and purpose of analytical procedures2

Assess going concern

Secondary purpose

Indicate possible misstatements

(attention directing)

Primary purpose

Reduce detailed tests

Timing and Purpose ofAnalytical Procedures

Purpose

(Required)

Completion Phase

Understand client’s

industry and business

learning objective 7
Learning Objective 7

Select the most appropriate

analytical procedure from

among the five major types.

five major types of analytical procedures
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 client and industry data
Compare Clientand Industry Data

ClientIndustry

2002200120022001

Inventory turnover 3.4 3.5 3.9 3.4

Gross margin percent 26.3% 26.4% 27.3% 26.2%

compare client data with similar prior period data
Compare Client Data WithSimilar Prior-period Data

2002 2001

(000,000) % of (000,000) % of

PreliminaryNet SalesAuditedNet Sales

Net sales 143 100 131 100

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
Learning Objective 8

Compute common

financial ratios.

common financial ratios
Common Financial Ratios

Short-term debt-paying ability

Liquidity activity ratios

Ability to meet long-term debt obligations

Profitability ratios

short term debt paying ability
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
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 ratios1
Liquidity Activity Ratios

Days to sell inventory:

365 days ÷ inventory turnover

ability to meet long term debt obligation
Ability to Meet Long-termDebt Obligation

Debt to equity:

Total liabilities ÷ Total equity

Times interest earned:

Operating income ÷ Interest expense

summary of analytical procedures
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 client’s business and industry.

They are used throughout the audit to identify

possible misstatements, reduce detailed tests,

and to assess going-concern issues.