Modern Auditing:

Assurance Services and the Integrity of Financial Reporting, 8th 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 7 Overview

Client Acceptance and Retention

Evaluating the Integrity of Management

Communicate with the Predecessor Auditor Make Inquiries of Other Third Parties

Review Previous Experience with Existing Clients

Identifying Special Circumstances and Unusual Risks

Identify Intended Users of Audited Statements Assess Prospective Clients Legal and Financial Stability Identify Scope Limitations Evaluate the Entitys Financial Reporting Systems and Auditability

Assessing Competence to Perform the Audit

Services Desired Identify the Audit Team
Partner Manager(s) Senior(s) Staff Assistants

Consider Need for Consultation and Specialists

Evaluating Independence
Identify Circumstances Impairing Independence Identify Professional Staff Financial and Business Relationships

Identify Conflicts of Interest with Other Clients

Making the Decision to Accept or Decline the Audit

Integrity of Management Special Circumstances and Unusual Risks Competence Issues Independence Issues

Preparing the Engagement 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 auditors responsibilities

Preparing the Engagement 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 the Engagement 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

Study Break
1. While evaluating the integrity of management, which would be considered to be the least useful? A. Inquiries of management B. Communications with preceding auditor C. Inquiries of other third parties D. Evaluate previous experiences with client A. Inquiries of management

Study Break
2. Outside specialists include all of the following except: A. Appraisers B. Internal auditors C. Actuaries D. Attorneys B. Internal auditors

Risk Assessment Procedures

Understanding the Entity and Its Environment

Industry, Regulatory, and Other External Factors

Industry Conditions

Regulatory Environment

Other External Factors Affecting the Entitys Business

The Nature of the Entity and Accounting Policies

Business Operations Investing Activities Financing Activities Financial Reporting

Entitys Objectives, Strategies, and Related Business Risks

Entitys Objectives Entitys Strategies Business Risks Effects of Implementing a Strategy

Measurement and Review of the Entitys Financial 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

Study Break
3. In order to understand the entitys ______, we must understand matters such as the accounting principles, revenue recognition practices, and financial statement presentation and disclosure. A. Business Operations B. Investing Activities C. Financing Activities D. Financial Reporting D. Financial Reporting

Study Break
4. ______ are the operational approaches by which management intends to achieve its objectives. A. Entitys objectives B. Entitys strategies C. Business risks D. Financing activities B. Entitys strategies