Modern Auditing:

Assurance Services and the Integrity

of Financial Reporting, 8th Edition

William C. Boynton
California Polytechnic State
University at San Luis Obispo
Raymond N. Johnson
Portland State University

Chapter 7 – Accepting the Engagement and Planning the

Audit
Chapter 7 Overview
Client Acceptance and Retention
 Evaluating the Integrity of
Management
• Communicate with the Predecessor
Auditor

• Make Inquiries of Other Third

Parties

• Review Previous Experience with

Existing Clients
Identifying Special Circumstances
and Unusual Risks
• Identify Intended Users of Audited
Statements

• Assess Prospective Client’s Legal and

Financial Stability

• Identify Scope Limitations

• Evaluate the Entity’s Financial

Reporting Systems and Auditability
 Assessing Competence to
Perform the Audit
• Services Desired

• Identify the Audit Team

– Partner
– Manager(s)
– Senior(s)
– Staff Assistants

• Consider Need for Consultation and

Specialists
 Evaluating Independence
• Identify Circumstances Impairing
Independence

• Identify Professional Staff Financial

and Business Relationships

• Identify Conflicts of Interest with

Other Clients
Making the Decision to Accept or
Decline the Audit
• Integrity of Management

• Special Circumstances and Unusual

Risks

• Competence Issues

• Independence Issues
Preparing the Engagement Letter

• Clear identification of entity and

financial statements to be audited

• Objective or purpose of the audit

• Reference to professional standards to be

followed

• Explain nature and scope of audit and

auditor’s responsibilities
Preparing the Engagement Letter
• Statement that not all material fraud
may be detected

• Reminder of management responsibility

for financial statements and internal
controls

• Indicate potential request for written

representations

• Describe any auxiliary services to be

provided
Preparing the Engagement Letter

• Basis on which fees will be computed and

billing arrangements

• Request to confirm terms of engagement

by signing and returning a copy to the
auditor
 Study Break
1. While evaluating the integrity of
management, which would be
considered to be the least useful?
A. Inquiries of management
B. Communications with preceding
auditor
C. Inquiries of other third parties
D. Evaluate previous experiences with
client

A. Inquiries of management
 Study Break
2. Outside specialists include all of
the following except:
A. Appraisers
B. Internal auditors
C. Actuaries
D. Attorneys

B. Internal auditors
Risk Assessment Procedures
Understanding the Entity and Its
Environment
Industry, Regulatory, and Other
External Factors
• Industry Conditions

• Regulatory Environment

• Other External Factors Affecting

the Entity’s Business
 The Nature of the Entity and
Accounting Policies
• Business Operations

• Investing Activities

• Financing Activities

• Financial Reporting
 Entity’s Objectives, Strategies,
and Related Business Risks
• Entity’s Objectives

• Entity’s Strategies

• Business Risks

• Effects of Implementing a Strategy

 Measurement and Review of the
Entity’s Financial Performance
• Ratios and Operating Statistics

• Performance Indicators

• Employee Performance Measures and Incentive

Compensation Plans

• Industry Trends

• Forecasts, Budgets, and Variance Analysis

• Analyst Reports and Credit Rating Reports

 Study Break
3. In order to understand the entity’s
______, we must understand matters
such as the accounting principles,
revenue recognition practices, and
financial statement presentation and
disclosure.
A. Business Operations
B. Investing Activities
C. Financing Activities
D. Financial Reporting

D. Financial Reporting
 Study Break
4. ______ are the operational
approaches by which management
intends to achieve its objectives.
A. Entity’s objectives
B. Entity’s strategies
C. Business risks
D. Financing activities

B. Entity’s strategies