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

1. 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

2. Chapter 7 Overview

3. Client Acceptance and Retention

4. Evaluating the Integrity of Management • Communicate with the Predecessor Auditor • Make Inquiries of Other Third Parties • Review Previous Experience with Existing Clients

5. 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

6. 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

7. Evaluating Independence • Identify Circumstances Impairing Independence • Identify Professional Staff Financial and Business Relationships • Identify Conflicts of Interest with Other Clients

8. Making the Decision to Accept or Decline the Audit • Integrity of Management • Special Circumstances and Unusual Risks • Competence Issues • Independence Issues

9. 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

10. 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

11. 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

12. 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

13. Study Break 2. Outside specialists include all of the following except: • Appraisers • Internal auditors • Actuaries • Attorneys B. Internal auditors

14. Risk Assessment Procedures

15. Understanding the Entity and Its Environment

16. Industry, Regulatory, and Other External Factors • Industry Conditions • Regulatory Environment • Other External Factors Affecting the Entity’s Business

17. The Nature of the Entity and Accounting Policies • Business Operations • Investing Activities • Financing Activities • Financial Reporting

18. Entity’s Objectives, Strategies, and Related Business Risks • Entity’s Objectives • Entity’s Strategies • Business Risks • Effects of Implementing a Strategy

19. 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

20. 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

21. 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