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Chapter 9 Cabrera Applied Auditing

Chapter 9 Cabrera Applied Auditing

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Published by Cristy Estrella
Applied Auditing by Cabrera
Applied Auditing by Cabrera

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Categories:Types, Research
Published by: Cristy Estrella on Aug 07, 2013
Copyright:Attribution Non-commercial

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04/12/2014

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CHAPTER 9AUDIT PLANNING, SUPERVISIONAND MONITORING
I.
 Review Questions
1.
 Audit planning 
means developing a general strategy and a detailed approach for the expected nature, timing, and extent of the audit. The auditor plans to perform the audit in an efficient and timely manner.Adequate planning of the audit work accomplishes among others the following:(1)It ensures that appropriate attention is devoted to important areas of theaudit,(2)It enables the auditor to identify potential problems,(3)It enhances completion of audit expeditiously, and(4)It assists in proper assignment of work to assistants and in coordination of work done by other auditors and experts.2.Significant matters to be considered by the auditor in developing the overallaudit plan include1.Knowledge of the Business2.Understanding of the Accounting and Internal Control System3.Assessment of Risk and Materiality4.Nature, Timing and Extent of Audit Procedures5.Coordination, Direction, Supervision and Review6.Other matters, such as assessment of the going concern assumption, related parties, nature and timing of reports and other communications with theentity.3.To obtain information about the client’s business and industry, an auditor canreview prior-year working papers, review current-year client information,inquire of management and the audit committee, read PICPA, AICPA, industryaudit and accounting guides relevant to the client, and read significant industry publications and manuals maintained by the firm on the industry.4.Specific audit procedures presented in the auditing standards as methods of detecting related-party transactions are as follows:
 
9-2
Solutions Manual - Principles of Auditing and Other Assurance Services
Examine company procedures for identifying and accounting for related-party transactions.
Inquire of management about related parties and any transactions thatoccurred during the period.
Review entity filings with the SEC and other regulatory authorities for named related parties and other entities in which officers and directorsserve in management or directorship positions.
Determine the names of all pension and other employee benefit trustsand the names of officers and trustees.
Review stockholder listings of closely held companies to identify principal shareholders.
Review prior-year working papers for names of related parties.
Inquire of auditors of related entities regarding management’sinvolvement in material transactions.5.Warning signs that materially question management integrity impact the clientacceptance decision. The auditor must determine whether the suspicionsaroused by such warning signs have validity and, if so, whether, under thecircumstances, the auditor can continue to be associated with the financialstatements. Additionally, the auditor has a responsibility to communicateknown illegal acts, as well as other findings of this nature, to the auditcommittee of the client’s board of directors.6.Preliminary audit programs are designed on the basis of the auditor’s initialassessment of inherent risk and control risk. The preliminary programs may bemodified as a result of auditor testing of control procedures and revisedassessment of control risk. The preliminary programs, as modified by the resultsof control testing, are referred to as final audit programs.7.The audit time budget facilitates staff scheduling and fee estimating, in that itdisplays the audit in terms of hours required to complete each phase and level of staff required for each sector. A second purpose served, when actual times arerecorded in the time budget, is that variances are isolated and may beinvestigated for cause. This, in turn, facilitates preparation of next year’s time budget, and also isolates added hours which may be chargeable to the client because of client-caused audit problems and delays.8.The preaudit conference conducted by the audit manager and the in-chargesenior auditor and comprising the audit team assigned to the engagement,increases audit effectiveness by:a.Discussing the results of audit risk analysis with the audit team; b.Familiarizing the audit team members with the nature of the client; and
 
 Audit Planning, Supervision and Monitoring 
 
9-3
c.Making each team member aware of how identified warning signsimpact the audit tasks assigned to him/her.9.The three primary reasons an auditor should obtain a good understanding of theclient’s industry are:
to enable the auditor to evaluate whether the client’s financialstatements are in accordance with GAAP, since many industries haveunique accounting requirements.
to enable the auditor to identify risks in the industry that may affect theauditor’s assessment of acceptable audit risk.
to enable the auditor to assess the client’s areas of high inherent risk.The auditor can obtain a sound understanding of the client’s industry throughseveral means, including discussions with previous auditors and by reviewingthe permanent files for the client; conferences with the client’s personnel;studying textbooks, technical magazines and specialized journals; and by participating in industry associations and training programs.10.Paragraph 12 of PSA 300 provides the following:“The overall audit plan and the audit program
 should be revised as necessary
during the course of the audit. Planning is continuous throughout theengagement because of changes in conditions or unexpected results of audit procedures. The reasons for significant changes would be recorded.”11.The purpose of applying analytical procedures in
 planning 
the audit is to assistin understanding the business and in identifying areas of potential risk. It willtherefore assist the auditor in planning the nature, time, and extent of auditing procedures that will be used to obtain evidential matter for specific account balances or classes of transactions. By identifying such things as the existenceof unusual transactions and events, and amount ratios and trends, matters thathave financial statement and audit planning ramifications might be brought tolight. Likewise, relevant non-financial information such as number of employees, area of selling space, volume of goods produced may also contributeto the accomplishment of the purpose of the analytical procedures.12.Refer to page 372 (letter a) of the textbook.13.Refer to page 372 (letter b) of the textbook.14.Refer to page 375 of the textbook.

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