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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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Governance includes the clients organizational structure, as well as the activities of the board of directors and the audit committee.
Corporate charter and bylaws Code of ethics Meeting minutes
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 8 - 16
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.
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder 8 - 19
Learning Objective 4
Assess client business risk.
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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
2008 Prentice Hall Business Publishing, Auditing 12/e, Arens/Beasley/Elder
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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
SAS 56 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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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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