Modul 2 YLZaud1 2 Planning and analitical procedures
Acceptable audit risk is a measure of how willing the auditor is to accept that the
financial statements may be materially misstated after the audit is completed and
an unqualified opinion has been issued.
Inherent risk is a measure of the auditor’s assessment of the likelihood that there
are material misstatements in an account balance before considering the
effectiveness of internal control.
If inherent risk is high, more evidence will be accumulated in the audit of
inventory and more experienced staff will be assigned to perform testing in this
The auditor decides whether to accept a new client or continue serving an existing
one.
Identifying the reasons for the audit is likely to affect the remaining parts of the
planning process.
The auditor also needs to obtain an understanding with the client about the terms
of the engagement.
It is better to have no work than high risk, “bad work”.
Annual client evaluations is the time to critically and honestly assess whether to
continue associating with a particular client. Engagement risk, audit risk,
detection risk and inherent risk are all factors that need to be considered.
Business and industry risk may even affect the auditor’s decision against
accepting engagements in riskier industries such as financial services or health
insurance.
Risks common to a particular industry may include inventory obsolescence,
accounts receivable collection risk, reserve for losses in the casualty insurance
industry.
A related party is defined as an affiliated company, a principal owner of the client
company, or any other party with which the client deals, where one of the parties
can influence the management or policies of the other.
Effective boards ensure the company takes only appropriate risks while the audit
committee, through oversight of financial reporting, can reduce the likelihood of
overly aggressive accounting.
To gain an understanding of the client's governance system, the auditor should
understand how the board and audit committee exercise oversight along with the
following:
The corporate charter
Auditor’s assessment of client business risk considers the industry and other
external factors as well as the client’s business strategies processes and other
internal factors.
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.
Auditors perform preliminary analytical procedures to better understand the
client’s business and to assess client business risk.
A major purpose is to gain an understanding of the client’s business and industry
which is used to assess acceptable audit risk, client business risk and the risk of
material misstatements in the financial statements.
Analytical procedures are defined by auditing standards as evaluations of
financial information made by a study of plausible relationships among financial
and nonfinancial data involving comparisons of recorded amounts to expectations
developed by the auditor.
Required in the planning phase to assist in determining the nature extent and
timing of audit procedures.
Analytical procedures are often done during the testing phase of the audit as a
substantive test in support of account balances.
The most important benefit of industry comparison are to aid in understanding the
client's business and as an indication of the likelihood of financial failure.
Activity ratios for accounts receivable and inventory are useful to auditors who
often use trends in the accounts receivable turnover ratio to assess the
reasonableness of the allowance for uncollectible accounts. Same concept applies
to inventory turnover ratios and potentially obsolete inventory.
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
financial statements may be materially misstated after the audit is completed and
an unqualified opinion has been issued.
Inherent risk is a measure of the auditor’s assessment of the likelihood that there
are material misstatements in an account balance before considering the
effectiveness of internal control.
If inherent risk is high, more evidence will be accumulated in the audit of
inventory and more experienced staff will be assigned to perform testing in this
The auditor decides whether to accept a new client or continue serving an existing
one.
Identifying the reasons for the audit is likely to affect the remaining parts of the
planning process.
The auditor also needs to obtain an understanding with the client about the terms
of the engagement.
It is better to have no work than high risk, “bad work”.
Annual client evaluations is the time to critically and honestly assess whether to
continue associating with a particular client. Engagement risk, audit risk,
detection risk and inherent risk are all factors that need to be considered.
Business and industry risk may even affect the auditor’s decision against
accepting engagements in riskier industries such as financial services or health
insurance.
Risks common to a particular industry may include inventory obsolescence,
accounts receivable collection risk, reserve for losses in the casualty insurance
industry.
A related party is defined as an affiliated company, a principal owner of the client
company, or any other party with which the client deals, where one of the parties
can influence the management or policies of the other.
Effective boards ensure the company takes only appropriate risks while the audit
committee, through oversight of financial reporting, can reduce the likelihood of
overly aggressive accounting.
To gain an understanding of the client's governance system, the auditor should
understand how the board and audit committee exercise oversight along with the
following:
The corporate charter
Auditor’s assessment of client business risk considers the industry and other
external factors as well as the client’s business strategies processes and other
internal factors.
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.
Auditors perform preliminary analytical procedures to better understand the
client’s business and to assess client business risk.
A major purpose is to gain an understanding of the client’s business and industry
which is used to assess acceptable audit risk, client business risk and the risk of
material misstatements in the financial statements.
Analytical procedures are defined by auditing standards as evaluations of
financial information made by a study of plausible relationships among financial
and nonfinancial data involving comparisons of recorded amounts to expectations
developed by the auditor.
Required in the planning phase to assist in determining the nature extent and
timing of audit procedures.
Analytical procedures are often done during the testing phase of the audit as a
substantive test in support of account balances.
The most important benefit of industry comparison are to aid in understanding the
client's business and as an indication of the likelihood of financial failure.
Activity ratios for accounts receivable and inventory are useful to auditors who
often use trends in the accounts receivable turnover ratio to assess the
reasonableness of the allowance for uncollectible accounts. Same concept applies
to inventory turnover ratios and potentially obsolete inventory.
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