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Chapter 8
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Learning Objective 1
Discuss why adequate audit planning is essential.
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Risk Terms
Acceptable audit risk Inherent risk
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Learning Objective 2
Make client acceptance decisions and perform initial audit planning.
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Learning Objective 3
Gain an understanding of the clients business and industry.
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Code of Ethics
In response to the Sarbanes-Oxley Act, the SEC now requires each public company to disclose whether is has adopted a code of ethics that applies to senior management. The SEC also requires companies to disclose amendments and waivers to the code of ethics.
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Performance measurement includes ratio analysis and benchmarking against key competitors.
2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 8 - 19
Learning Objective 4
Assess client business risk.
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Sarbanes-Oxley Act
The Sarbanes-Oxley Act requires that management certify it has designed disclosure controls and procedures to ensure that material information about business risks is made known to them. It also requires that management certify it has informed the auditor and audit committee of any significant deficiencies in internal control.
2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley 8 - 23
Learning Objective 5
Perform preliminary analytical procedures.
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Client Industry
3.86 3.36 5.20 5.20
Ability to meet long-term obligations: Debt to equity 1.73 Profitability ratio: Profit margin
2010 Prentice Hall Business Publishing, Auditing 13/e, Arens/Elder/Beasley
2.51
0.07
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0.05
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Learning Objective 6
State the purposes of analytical procedures and the timing of each purpose.
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Analytical Procedures
AU 329 emphasizes the expectations developed by the auditor. 1. Required in the planning phase 2. Often done during the testing phase 3. Required during the completion phase
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Primary purpose
Learning Objective 7
Select the most appropriate analytical procedure from among the five major types.
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3.4 26.3%
3.5 26.4%
3.9 27.3%
3.4 26.2%
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Learning Objective 8
Compute common financial ratios.
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Quick ratio
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Profitability Ratios
Earnings per share Gross profit percent = Net income Average common shares outstanding (Net sales Cost of goods sold) Net sales
Profit margin =
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Profitability Ratios
Return on = assets Return on common = equity Income before taxes Average total assets (Income before taxes Preferred dividends) Average stockholders equity
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End of Chapter 8
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