what are the steps in the prospective client acceptance
- obtain and review financial info (drafts)
- inquire of third parties (banks, lawyers, suppliers)
- communicate with the predecessor auditor
- consider unusual business
- determine if firm is independent
- determine if firm has the necessary skills and knowledge
- determine if acceptance violates code of prof conduct
what does it mean when considering unusual business
e.g. IPO (increase in litigation), client gets business from unstable country, client gets majority of business from one company
what else should be considered besides the necessary skills and knowledge
should be considered if there is enough staff, evaluate if the client is auditable
what should be looked at when considering if a client is auditable
natural disaster or management imposed scope limitation, not using applicable reporting framework, weak internal control, if management does not want to take responsibility
what are some issues with 1st time audit
scope limitation in the income statement because of COGS and if there is a beg. balance in inventory (does not give chances of assurance)
when is there a scope limitation in the balance sheet
when its a 1st time audit and the client gets audited late
what is the engagement letter and how often should it be done
its a letter that forms the contract of the audit and it should be done every time (even if its a continuing client)
what are some important things the engagement letter contains
- specify type of engagement
- exceptions to confidentiality rule
- audit fees
what are managements most important responsibilities
- preperation of F/S
- design and implement internal controls
- F/S does not contain fraud
What is the planning workflow
- perform risk assessment procedures and identify risks
- determine audit strategy
- determine planned audit approach
why is a performance risk assessment important
it helps you find out which accounts are riskier and what accounts to spend more time on
why is the audit plan important
help determine what resources are needed to perform the engagement
what are the three planning documents in increasing level of complexity
audit strategy - most general
audit plan
audit program - list of audit procedures and when you do them - most specific
what are some important activities in the audit planning stage
- assess need for specialist
- assess possibility of illegal acts
- identify related parties (will be disclosed in notes of F/S)
- conduct preliminary analytical procedures
- document audit strategy and plan
why must we have a preliminary understanding of auditee’s business
- helps understand F/S risks
- helps establish overall audit strategy, plan, and program
why are preliminary analytical procedures used for
- to understand client’s business and transactions
- to identify F/S accounts that are more prone to error
what stages can the analytical procedures be done in, what can they be used for, and are they required
- planning stage - required - used to identify riskiest accounts
- implementation stage - optional
- conclusion stage - required - asses overall reasonableness of AUDITED F/S
list the general analytical procedures
- compare current year balances to prior year
- compare current year numbers with industry numbers
- compare current year numbers with budgeted amounts
- calculate ratios to compare accounts within the year
