Chapter 8

Homework Solutions
Audit Planning and Analytical Procedures

 Multiple Choice Questions From CPA Examinations

8-25 a. (3) b. (3) c. (4) d. (1)
8-26 a. (1) b. (4) c. (4)
8-27 a. (4) b. (1) c. (2) d. (4)

 Discussion Questions And Problems

8-28

Audit Activities Related Planning Procedure

1. Send an engagement letter to the
client.
2. Tour the client’s plant and offices.
3. Compare key ratios for the
company to industry competitors.
4. Review management’s controls
and procedures.
5. Review the accounting principles
unique to the client’s industry.
6. Determine the likely users of the
financial statements.
7. Identify potential related parties
that may require disclosure.
8. Identify whether any specialists
are required for the engagement.
(1) Accept client and perform initial
audit planning
(2) Understand the client’s business
and industry
(4) Perform preliminary analytical
procedures
(3) Assess client’s business risk
(2) Understand the client’s business
and industry.
(1) Accept client and perform initial
audit planning.
(2) Understand the client’s business
and industry
(1) Accept client and perform initial
audit planning

8-37
8-30 a. First, the minutes of each meeting refer to the minutes of a previous
meeting. The auditor should ensure that they have been provided
access to all noted minutes, including the next year’s minutes,
probably for March 2012, to make sure the previous minutes referred
to were those from October 21, 2011.
Additionally, the auditor will request the client to include a
statement in the client representation letter stating that all minutes
were provided to the auditor.
b.

INFORMATION RELEVANT
TO 2011 AUDIT AUDIT ACTION REQUIRED
March 5: Calculate the total dividends and determine that
1. Increase in annual dividends paid to shareholders are properly reflected in
dividend payment. the financial statements.
2. Approval of additional During analytical procedures, an increase in administrative
administration expenses expenses should be included in the auditor’s expectation
to open offices in of the expense balance. The auditor should be alert for
Portland. other potential commitments that may have been made to
open offices in the Northwest region.
3. Approval to engage in Determine the status of any potential acquisition or
negotiations for a merger negotiations. Be alert for any commitments that
potential acquisition. may have been made as part of the negotiations
process that may warrant financial statement disclosure.

8-38
8-30 (continued)

INFORMATION RELEVANT
TO 2011 AUDIT AUDIT ACTION REQUIRED
4. Potential negative Evaluate the status of any resolution of negotiations with
findings from EPA the EPA regarding findings in their report. Determine if
investigation. any final determinations have been made about potential
fines. Evaluate the need for recording any provisions for
a loss contingency or disclosure of the status of the
negotiations.
5. Officers’ bonuses. Determine whether bonuses were accrued at 12-31-10
and were paid in 2011. Consider the tax implications of
unpaid bonuses to officers.
6. Discussion at the Determine what, if any, decisions made at either meeting
Audit Committee have any impact on the audit of the financial statements.
and Compensation
Committee.
October 21:
1. Reduction in sales and During analytical procedures, both the decrease in
the related cutback in revenues and the decreases in labor and shipping costs
labor and shipping costs. should be included in the auditor’s expectation of the
related account balances. The auditor should be alert to
the fact that the drop in operating performance might
create undue incentives and pressures that could highlight
the risk of fraud.
2. Approval of the Examine acquisition documentation and financing
acquisition and related documentation to understand the impact to the financial
financing. statements for recording the acquisition and the debt
transaction. Consider what commitments and
contingencies exist and evaluate the appropriateness of
the recording of the acquisition transaction and related
disclosures.
3. Consideration of a new Determine if the new incentive stock option plan has
incentive stock option been approved. If so, consider any accounting
plan. treatments required to reflect any commitments on the
part of the company and evaluate the tax implication of
the plan and need for related disclosure.
4. Identification of Discuss with management the nature of the deficiencies
deficiencies in internal in internal control and evaluate the impact of any
control. remediation activities to address the deficiencies.
Evaluate the impact of remediation on the auditor’s tests
of controls and need for substantive procedures.

8-39
8-30 (continued)

INFORMATION RELEVANT
TO 2011 AUDIT AUDIT ACTION REQUIRED
5. Resolution of the EPA Examine the EPA resolution agreement and determine if
report findings. the provision has been recorded for the expected costs
to modify the air handling equipment . Consider the need
for any additional disclosures of this resolution.
6. Discussion at the Audit Determine what, if any, decisions made at either meeting
Committee and have any impact on the audit of the financial statements.
Compensation
Committee.

c. The auditor should have obtained and read the March minutes,
before completing the 12-31-10 audit. Two items were especially
relevant and require follow-up for the 12-31-10 audit: the investigation
by the EPA and approval for the 12-31-10 bonuses.

8-31

Statement Related Stage of Audit

1. Not required during this stage. 2. Substantive testing
2. Should focus on enhancing the 1. Planning the audit
auditor’s understanding of the
client’s business and the
transactions and events that have
occurred since the last audit date.
3. Should focus on identifying areas 1. Planning the audit
that may represent specific risks
relevant to the audit.
4. Require documentation in the 2. Substantive testing
working papers of the auditor’s
expectation of the ratio or account
balance.
5. Do not result in detection of 4. Statement is not correct concerning
misstatements. analytical procedures
6. Designed to obtain evidential 2. Substantive testing
matter about particular assertions
related to account balances or
classes of transactions.

8-40
8-31 (continued)

Statement Related Stage of Audit

7. Generally use data aggregated at 2. Substantive testing
a lower level than the other stages.
8. Should include reading the 3. Overall review
financial statements and notes to
consider the adequacy of evidence
gathered.
9. Involve reconciliation of 4. Statement is not correct concerning
confirmation replies with recorded analytical procedures
book amounts.
10. Use of preliminary or unadjusted 1. Planning the audit
working trial balance as a source
of data.
11. Expected to result in reduced level 2. Substantive testing
of detection risk.

8-41