Auditing: Engagement Planning: Lecture 6 - Professor Helen Brown Liburd (Spring 2014)

Principles of Auditing: Professor Helen Brown Liburd
Lecture 6
Engagement Planning (& Management Assertions)
February 14, 2014
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TIME STAMPS
2:17 Three Main Reasons for Planning
5:22 Pre-Engagement Activities
14:49 Predecessor & Prospective Auditor Communication
17:16 Engagement Letter
17:56 Planning an Audit & Designing an Audit Approach
38:14 Understanding of the Client's Business & Industry
42:34 Assess Client Business Risk
42:56 Performing Preliminary Analytical Procedures
44:07 Five Types of Analytical Procedures
45:54 Management Assertions
47:26 Objective of an Audit
47:54 Steps to Develop Audit Objectives
1:01:27 Sarbanes-Oxley Act of 2002
1:03:40 Auditor's Responsibilities
1:04:59 Management Assertions
1:05:34 Auditor's Transaction-Related Audit Objectives
1:07:05 Chart / List of Assertions
3 main reasons for planning: (a) To obtain sufficient competent evidence, (b) To help keep audit costs reasonable, and (c) to avoid misunderstanding with the client.
Pre-engagement activities include client acceptance or continuance, communication between predecessor and prospective auditors, compliance with independence and ethical requirements, engagement letters, and termination letters.
If a predecessor auditor exists, the current auditor must attempt to communicate with them (if the client permits it). Issues that should be discussed include disagreements about accounting principles or audit procedures, communications the predecessor auditors gave the former client about fraud, illegal acts, and internal control recommendations, and the predecessor auditors' understanding about the reasons for the change of auditors (particularly about the predecessor auditors' termination).
The steps involved in planning an audit and designing an audit approach include: accepting the client and performing initial audit planning, understanding the client's business and industry, assessing the client's business risk, performing preliminary analytical procedures, setting materiality and assessing acceptable audit risk and inherent risk, understanding internal control and assessing control risk, gathering information to assess fraud risks, and developing the overall audit plan and audit program.
Analytical procedures are computations of ratios and other comparisons of recorded amounts to auditor expectations. They are used in planning to understand the client's business and industry. They are used throughout the audit to identify possible misstatements, reduce detailed tests, and to assess going-concern issues.
The purpose of an audit is to provide financial statement users with an opinion by the auditor on whether the financial statements are presented fairly, in all material respects, in accordance with applicable financial accounting framework.
To develop audit objectives, the auditor must understand the objectives and responsibilities for the audit, divide the financial statements into cycles, know management assertions about financial statements, know general audit objectives for classes of transactions, accounts, and disclosures, and know specific audit objectives for classes of transactions, accounts, and disclosures.
The Sarbanes-Oxley Act of 2002 addresses management's responsibility for financial reporting. One of its most important provisions clearly indicates that the management team is responsible for the financial reporting process and the financial statements. In fact, Section 302 of the Act states that the key company officials must certify the financial statements. That is, the company CEO and CFO must sign a statement indicating: (1) they have read the financial statements, (2) they are not aware of any false or misleading statements (or any key omitted disclosures), and (3) they believe that the financial statements present an accurate picture of the company's financial condition.
Auditor's transaction-related audit objectives are closely related to management assertions. They serve as a framework to accumulate sufficient appropriate audit evidence. Objectives never vary, but evidence will vary depending on the circumstances present for each audit (such as general transaction-related audit objectives, balance-related audit objectives, and presentation related audit objectives). The auditor must obtain sufficient appropriate audit evidence to support all management assertions in the financial statements.
Management must make assertions regarding occurrence, completeness, accuracy, classification, and cutoff.
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