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Key objectives:
1.
2.
3.
4.
5.
Underauditing (too little evidence) Auditor assumes more risk than desired.
Overauditing (too much evidence) Audit risk is reduced, but audit is
inefficient.
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statements are.
The users of the financial statements affects
the risk of the engagement (recall discussion
of liability to third parties in Ch. 5), which
influences the amount of evidence needed.
The relationship between risk and evidence is
discussed more fully in Ch. 9.
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C.
2.
3.
4.
4.
FIGURE 8-3
Strategic Systems 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
Measurement and
Performance
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6.
Purpose
Common form of
Test
Example
Understand
client business
Comparison to
industry using broad
ratios
Going Concern
Statistical prediction
model based on key
ratios
Attention
directing
Comparison to prior
year or expected
value
Reduce detail
tests
Comparison using
highly predictable
relationships or
nonfinancial data
Accounts payable.
Advertising expense.
Accounts receivable.
Interest expense.
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B.
Forms of Comparison
1.
2.
3.
4.
5.
Industry data
Prior period data
Budget
Auditor expected results
Nonfinancial data
42 %
40 %
$20,000,000
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$1,000,000
$50,000
66
59,864
194,371
3.25
5.20
D.
7.
Chapter 8
Additional Reading - SAS #59 (AU 341), The Auditor's Consideration of the
Entity's Ability to Continue as a Going Concern.
Discussion Case Regina Vacuum
Homework Problems
8-33
8-34 (If time permits, we will complete this problem in class)
Problem 8-33
a.
The client's explanation is true, but does not account for the total change
in gross profit. The following is the gross margin on the two product lines:
2009
2008
2007
2006
Drugs
Nondrugs
40.6%
42.2%
42.1%
42.3%
32.0%
32.0%
31.9%
31.8%
The change in drug gross margin is much larger than for the industry, and
appears to be material ([42.2 - 40.6] x 5,126,000 = $82,000).
b.
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Problem 8-34
Condition
a. Significance
b. Follow-up
1.
Commission
expense percentage
increased
Possible overstatement
of expense
2.
Inventory turnover
decreasing
Possible obsolescence
Possible overstatement
of inventory
3.
Inventory % of
current assets
increasing
4.
Days sales in AR
increasing
5.
Allowance as % of
AR decreased
6.
Depreciation
expense lower than
preceding year