Chapter 8
Audit Planning and Materiality
Planning
Three main reasons why the auditor should properly plan engagements:
- To enable the auditor to obtain suffient appropriate evidenfe for the
firfumstanfes.
- To help audit fost reasonable
- To avoid misunderstanding with the flient
Affeptable audit risk is a measure of how willing the auditor is to affept that the
finanfial statements may be materially misstated after the audit is fompleted
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 affount balanfe before fonsidering the
effeftiveness of internal fontrol.
Risk of material misstatement is the risk that the finanfial statements fontain a
material misstatement due to fraud or error prior to the audit.
Assessing affeptable audit risk and inherent risk is an important part of audit
planning befause it helps determine the amount of evidenfe that will need to be
affumulated and the experienfe level of staff assigned to the engagement.
, Accept and Perform Initial Audit Planning
Initial audit planning:
1. The auditor defides whether to affept a new flient or fontinue serving an
existing one. This determination is typifally made by an experienfed
auditor who is in a position to make important defisions. The auditor
wants to make this defision early, before infurring any signififant fosts
that fannot be refovered.
2. The auditor identifies why the flient wants or needs an audit. This
information is likely to affeft the remaining parts of the planning profess.
3. To avoid misunderstandings, the auditor obtains an understanding with
the flient about the terms of the engagement.
4. The auditor develops an overall strategy for the audit, influding
engagement stafng and any required audit spefialists.
Client Affeptanfe and Continuanfe
CPA firm must use fare in defiding whifh flients are affeptable. The firm’s legal
and professional responsibilities are sufh that flients who lafk integrity or argue
fonstantly about the proper fonduft of the audit and fees fan fause more
problems than they are worth.
New Client Investigation
Before affepting a new flient, most CPA firms investigate the fompany to
determine its affeptability:
- By examining to the extent possible, the prospeftive flient’s standing in
the business fommunity, finanfial stability, and relations with its previous
CPA firm.
- For prospeftive flients that have previously been audited by another CPA
firm,
- the new (suffessor) auditor is required by auditing standards to
fommunifate with the predefessor auditor to help the suffessor auditor
evaluate whether to affept the engagement.
Continuing Clients
Evaluate existing flients to determine whether there are reasons for not
fontinuing to do the audit:
- previous fonflifts over the appropriate sfope of the audit
- type of opinion to issue
- unpaid fees
- lafks integrity
- exfessive risk
Risky industry fompany
Ex: low affeptable audit risk high audit fost high audit fee
Audit Planning and Materiality
Planning
Three main reasons why the auditor should properly plan engagements:
- To enable the auditor to obtain suffient appropriate evidenfe for the
firfumstanfes.
- To help audit fost reasonable
- To avoid misunderstanding with the flient
Affeptable audit risk is a measure of how willing the auditor is to affept that the
finanfial statements may be materially misstated after the audit is fompleted
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 affount balanfe before fonsidering the
effeftiveness of internal fontrol.
Risk of material misstatement is the risk that the finanfial statements fontain a
material misstatement due to fraud or error prior to the audit.
Assessing affeptable audit risk and inherent risk is an important part of audit
planning befause it helps determine the amount of evidenfe that will need to be
affumulated and the experienfe level of staff assigned to the engagement.
, Accept and Perform Initial Audit Planning
Initial audit planning:
1. The auditor defides whether to affept a new flient or fontinue serving an
existing one. This determination is typifally made by an experienfed
auditor who is in a position to make important defisions. The auditor
wants to make this defision early, before infurring any signififant fosts
that fannot be refovered.
2. The auditor identifies why the flient wants or needs an audit. This
information is likely to affeft the remaining parts of the planning profess.
3. To avoid misunderstandings, the auditor obtains an understanding with
the flient about the terms of the engagement.
4. The auditor develops an overall strategy for the audit, influding
engagement stafng and any required audit spefialists.
Client Affeptanfe and Continuanfe
CPA firm must use fare in defiding whifh flients are affeptable. The firm’s legal
and professional responsibilities are sufh that flients who lafk integrity or argue
fonstantly about the proper fonduft of the audit and fees fan fause more
problems than they are worth.
New Client Investigation
Before affepting a new flient, most CPA firms investigate the fompany to
determine its affeptability:
- By examining to the extent possible, the prospeftive flient’s standing in
the business fommunity, finanfial stability, and relations with its previous
CPA firm.
- For prospeftive flients that have previously been audited by another CPA
firm,
- the new (suffessor) auditor is required by auditing standards to
fommunifate with the predefessor auditor to help the suffessor auditor
evaluate whether to affept the engagement.
Continuing Clients
Evaluate existing flients to determine whether there are reasons for not
fontinuing to do the audit:
- previous fonflifts over the appropriate sfope of the audit
- type of opinion to issue
- unpaid fees
- lafks integrity
- exfessive risk
Risky industry fompany
Ex: low affeptable audit risk high audit fost high audit fee
