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Chapter 6 - Planning the audit; linking audit procedures to risk. This chapter explained the manner in which auditors plan an audit and design audit programs. In this chapter, the learning objectives are: Identify the factors considered by auditors in accepting new clients, explain a CPA's responsibilities when planning an audit, explain how the auditors assess a client's business risk and use these risks to determine inherent risks. | Planning the Audit; Linking Audit Procedures to Risk Chapter 6 1 Items Included in Engagement Letters Name of the entity Management responsibilities Financial statements Establishing effective internal control over financial reporting Compliance with laws and regulations Making records available to the auditors Providing written representations at end of the audit, including that adjustments discovered by the auditors and not recorded to the financials are not material Auditor responsibilities Conducting an audit in accordance with GAAS Obtaining an understanding of internal control to plan audit and to determine the nature, timing and extent of procedures Making communications required by GAAS 6- 2 2 Engagement Letters--Optional Items Arrangements regarding Conduct of the audit (e.g., timing, client assistance) Use of specialists or internal auditors Obtaining information from predecessor auditors Fees and billing Other services to be provided, such as examination of internal . | Planning the Audit; Linking Audit Procedures to Risk Chapter 6 1 Items Included in Engagement Letters Name of the entity Management responsibilities Financial statements Establishing effective internal control over financial reporting Compliance with laws and regulations Making records available to the auditors Providing written representations at end of the audit, including that adjustments discovered by the auditors and not recorded to the financials are not material Auditor responsibilities Conducting an audit in accordance with GAAS Obtaining an understanding of internal control to plan audit and to determine the nature, timing and extent of procedures Making communications required by GAAS 6- 2 2 Engagement Letters--Optional Items Arrangements regarding Conduct of the audit (e.g., timing, client assistance) Use of specialists or internal auditors Obtaining information from predecessor auditors Fees and billing Other services to be provided, such as examination of internal control over financial reporting Limitation of or other arrangements regarding liability of auditors or client Conditions under which access to the auditors’ working papers may be granted to others 6- 3 Audit Planning Decide whether to accept the prospective client Obtain knowledge of client’s business and environment Make preliminary arrangements with the client Prepare the engagement letter Assess risks of material misstatement, including fraud risk Prepare the audit plan, preliminary program, and time budget 6- 4 3 Understanding the Client’s Business—Nature of the Client Competitive position Organizational structure Accounting policies and procedures Ownership Capital structure Product and service lines Critical business processes Internal control 6- Understanding the Client’s Business—Industry, Regulatory, and Other Factors Competitive environment Supplier and customer relationships Technology developments Major laws and regulations Economic conditions 6- .
