Modern

Modern Auditing:
Auditing:
Assurance
Assurance Services
Services and
and the
the Integrity
Integrity
of
of Financial Reporting, 8th Edition
Financial Reporting, 8 th
Edition

William C. Boynton
California Polytechnic State
University at San Luis Obispo
Raymond N. Johnson
Portland State University

Chapter 7 – Accepting the Engagement and Planning the

Audit
Chapter
Chapter 7
7 Overview
Overview
Client
Client Acceptance
Acceptance and
and Retention
Retention
 Evaluating
Evaluating the
the Integrity
Integrity of
of
Management
Management
• Communicate with the Predecessor
Auditor

• Make Inquiries of Other Third

Parties

• Review Previous Experience with

Existing Clients
Identifying
Identifying Special
Special Circumstances
Circumstances
and
and Unusual
Unusual Risks
Risks
• Identify Intended Users of Audited
Statements

• Assess Prospective Client’s Legal and

Financial Stability

• Identify Scope Limitations

• Evaluate the Entity’s Financial

Reporting Systems and Auditability
 Assessing
Assessing Competence
Competence to
to
Perform
Perform the
the Audit
Audit
• Services Desired

• Identify the Audit Team

– Partner
– Manager(s)
– Senior(s)
– Staff Assistants

• Consider Need for Consultation and

Specialists
 Evaluating
Evaluating Independence
Independence
• Identify Circumstances Impairing
Independence

• Identify Professional Staff Financial

and Business Relationships

• Identify Conflicts of Interest with

Other Clients
Making
Making the
the Decision
Decision to
to Accept
Accept or
or
Decline
Decline the
the Audit
Audit
• Integrity of Management

• Special Circumstances and Unusual

Risks

• Competence Issues

• Independence Issues
Preparing
Preparing the
the Engagement
Engagement Letter
Letter
• Clear identification of entity and
financial statements to be audited

• Objective or purpose of the audit

• Reference to professional standards to be

followed

• Explain nature and scope of audit and

auditor’s responsibilities
Preparing
Preparing the
the Engagement
Engagement Letter
Letter
• Statement that not all material fraud
may be detected

• Reminder of management responsibility

for financial statements and internal
controls

• Indicate potential request for written

representations

• Describe any auxiliary services to be

provided
Preparing
Preparing the
the Engagement
Engagement Letter
Letter
• Basis on which fees will be computed and
billing arrangements

• Request to confirm terms of engagement

by signing and returning a copy to the
auditor
Risk
Risk Assessment
Assessment Procedures
Procedures
Understanding
Understanding the
the Entity
Entity and
and Its
Its
Environment
Environment
Industry,
Industry, Regulatory,
Regulatory, and
and Other
Other
External
External Factors
Factors
• Industry Conditions

• Regulatory Environment

• Other External Factors Affecting

the Entity’s Business
 The
The Nature
Nature of
of the
the Entity
Entity and
and
Accounting
Accounting Policies
Policies
• Business Operations

• Investing Activities

• Financing Activities

• Financial Reporting
 Entity’s
Entity’s Objectives,
Objectives, Strategies,
Strategies,
and
and Related
Related Business
Business Risks
Risks
• Entity’s Objectives

• Entity’s Strategies

• Business Risks

• Effects of Implementing a Strategy

 Measurement
Measurement and
and Review
Review of
of the
the
Entity’s
Entity’s Financial
Financial Performance
Performance
• Ratios and Operating Statistics

• Performance Indicators

• Employee Performance Measures and Incentive

Compensation Plans

• Industry Trends

• Forecasts, Budgets, and Variance Analysis

• Analyst Reports and Credit Rating Reports