©2003 Prentice Hall Business Publishing, Auditing and Assurance Services 9/e, Arens/Elder/Beasley 8 - 1
Audit Planning and
Analytical
Procedures
Learning Objective 1
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Planning
The work is to be adequately planned, and assistants, if any, are to be properly supervised.
Acceptable audit risk
Planning an Audit and
Designing an Approach
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Planning an Audit and
Designing an Approach
Set materiality, and assess acceptable audit
risk and inherent risk
Understand internal control and assess
control risk
Learning Objective 2
Make client acceptance
decisions and perform
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Initial Audit Planning
Should the auditor accept a new client?
Identify why the client wants or needs an audit. Obtain an understanding with the client.
Learning Objective 3
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Understanding of the Client’s
Business and Industry
Understand Client’s Business and Industry
Industry and External Environment
Business Operations and Processes
Management and Governance
Objectives and Strategies
Understanding of the Client’s
Business and Industry
What are some factors that have increased the importance of understanding the
client’s business and industry?
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Industry and External
Environment
What are some reasons for obtaining an understanding of the client’s industry
and external environment?
Risks associated with specific industries Inherent risks common to all
clients in certain industries
Business Operations
and Processes
Factors the auditor should understand: – major sources of revenue
– sources of revenue
– key customers and suppliers – sources of financing
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Management and Governance
Management establishes the strategies and processes followed by the client’s business. Governance includes the client’s organizational
structure, as well as the activities of the board of directors and the audit committee.
Client Objectives
and Strategies
Strategies are approaches followed by the entity to achieve organizational objectives.
Auditors should understand client objectives.
Financial with laws and
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Measurement and Performance
The client’s performance measurement system includes key performance indicators. Examples:
Performance measurement includes ratio analysis and benchmarking against key competitors.
Learning Objective 4
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Assess Client Business Risk
Client business risk is the risk that the client will fail to achieve its objectives.
What is the auditor’s primary concern? – material misstatement of the financial
The Client’s Business, Risk, and
Auditor’s Risk Assessment
Industry and External Environment Business Operations and Processes Management and Governance
Objectives and Strategies
Measurement and Performance
Understand Client’s Business and Industry
Assess Client Business Risk
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Learning Objective 5
Preliminary Analytical
Procedures
Comparison of client ratios to industry or competitor benchmarks provides an indication of the company’s performance. Analytical procedures are also an important
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Examples of Planning Analytical
Procedures
Client Industry
Short-Term Debt-Paying Ability Current ratio
Liquidity Activity Ratio Inventory turnover
Ability to Meet Long-Term Obligations Debt to equity
Profitability
Return on assets
3.86 5.20
3.46 5.20
1.73 2.51
0.09 0.09
Summary of the Purposes
of Auditing Planning
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Key Parts of Planning
Key Parts of Planning
Understand the Client’s Business and Industry
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Key Parts of Planning
Assess Client affecting business risk
Key Parts of Planning
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Learning Objective 6
State the purposes of analytical
procedures and the timing of
Analytical Procedures
Analytical procedures use comparisons and relationships to assess whether account balances or other data appear reasonable.
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Timing and Purpose of
Analytical Procedures
(Required)
Planning Phase Purpose
Understand client’s industry and business Assess going concern
Indicate possible misstatements (attention directing)
Reduce detailed tests
Primary purpose
Secondary purpose
Primary purpose
Timing and Purpose of
industry and business Assess going concernIndicate possible misstatements
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Timing and Purpose of
Analytical Procedures
(Required)
Completion Phase Purpose
Understand client’s industry and business Access going concern
Indicate possible misstatements (attention directing)
Reduce detailed tests
Secondary purpose
Learning Objective 7
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Five Major Types of
Analytical Procedures
1. Compare client and industry data. 2. Compare client data with similar
prior-period data.
3. Compare client data with
client-determined expected results.
4. Compare client data with
auditor-determined expected results.
5. Compare client data with expected
Compare Client
and Industry Data
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Compare Client Data With
Similar Prior-period Data
2002 2001
(000,000) % of (000,000) % of
Preliminary Net Sales Audited Net Sales
Net sales 143 100 131 100
Cost of goods sold 103 72 95 72
Gross profit 40 28 36 28
S & A 32 22 30 23
Other 4 3 3 3
Learning Objective 8
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Common Financial Ratios
Short-term debt-paying ability
Liquidity activity ratios
Ability to meet long-term debt obligations
Short-term
Debt-paying Ability
Cash ratio:
(Cash + Marketable securities) ÷ Current liabilities
Quick ratio:
(Cash + Marketable securities
+ Net accounts receivable) ÷ Current liabilities
Current ratio:
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Liquidity Activity Ratios
Accounts receivable turnover:
Net sales ÷ Average gross receivables
Days to collect receivables:
365 days ÷ Accounts receivable turnover
Inventory turnover:
Liquidity Activity Ratios
Days to sell inventory:
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Ability to Meet Long-term Debt
Obligation
Debt to equity:
Total liabilities ÷ Total equity
Times interest earned:
Summary of Analytical
Procedures
They involve the computation 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,
