Tutorial (2)

Chapter 8: Audit Planning

Answer the following statements

1) What are the benefits derived from planning audits?

There are three primary benefits from planning audits:
1. It helps the auditor obtain sufficient appropriate evidence for the
circumstances.
2. It helps keep audit costs reasonable
3. It helps avoid misunderstandings with the client.

2) List the major steps in planning audits.

The steps in planning audits are:
1. Accept client and perform initial planning
2. Understand the client’s business and industry
3. Assess client business risk
4. Perform preliminary analytical procedures
5. Set materiality and assess acceptable audit risk and inherent risk
6. Understand internal control and assess control risk
7. Gather information to assess fraud risk
8. Develop overall audit strategy and audit program

3) What is achieved through the Initial Audit Planning?

a) The auditor decides whether to accept a new client or continue serving an existing
one.
b) Identifying the reasons for the audit is likely to affect the remaining parts of the
planning process.
c) The auditor also needs to obtain an understanding with the client about the terms of
the engagement.
d) The auditor develops an overall strategy for the audit including engagement
staffing and any required audit specialists.

4) What factors should an auditor consider prior to accepting an engagement? Explain.

Prior to accepting a client, the auditor should investigate the client. The auditor
should evaluate the client’s standing in the business community, financial
stability, and relations with its previous CPA firm. The primary purpose of new client
investigation is to ascertain the integrity of the client and the possibility of fraud.
The auditor should be especially concerned with the possibility of fraudulent financial
reporting since it is difficult to uncover.

5) What is the purpose of an engagement letter? What subjects should be covered in

such a letter?
An engagement letter is an agreement between the CPA firm and the client
concerning the conduct of the audit and related services to avoid any
misunderstanding between the CPA firm and audit client.
The engagement letter should include the engagement’s objectives, the
responsibilities of the auditor and management, and the engagement’s limitations.
Also it should state what services will be provided, whether any restrictions will be
imposed on the auditor’s work, deadlines for completing the audit, the engagement
letter may also include the auditor’s fees. In addition, the engagement letter
 informs the client that the auditor cannot guarantee that all acts of fraud will be
discovered.
6) Explain how to develop the Audit Strategy

 Preliminary audit strategy should consider

 client’s business and industry
 material misstatement risk areas
 number of client locations
 past effectiveness of controls
 Preliminary strategy helps auditor determine resource requirements and staffing
 staff continuity
 need for specialists

7) Discuss the factors an auditor should consider before accepting a company as an

audit client.

Answer: The auditor should investigate and consider the prospective client's
standing in the business community, financial stability, management's integrity,
and relations with its bankers, attorneys, and previous CPA firm. The auditor
should also determine whether he or she possesses the required competence and
independence to do the audit.