FAKULTAS EKONOMI & BISNIS

UNIKA ATMA JAYA

Pertemuan 2
[Planning]
Preliminary Analytical Procedure
FIANTONIUS SIHOTANG, SE.Ak, M.Ak, CA, CPMA, CPA
(Mata Kuliah: Praktik Pengauditan-2)

PRODI AKUNTANSI – UNIKA ATMA JAYA

SENIN – 20 FEBRUARI 2023
 Learning Objective 1

Discuss why adequate audit planning is

essential.

Page 2
 Three Main Reasons for
Planning
1. To obtain sufficient appropriate evidence
for the circumstances

2. To help keep audit costs reasonable

3. To avoid misunderstanding with the client

Page 3
Three Main Reasons for Planning

Page 4
 Risk Terms

➢ Acceptable audit risk

➢ Inherent risk

Page 5
 Learning Objective 2

Make client acceptance decisions and

perform initial audit planning.

Page 6
 Initial Audit Planning

1. Client acceptance and continuance

2. Identify client’s reasons for audit

3. Obtain an understanding with the client

4. Develop overall audit strategy

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 Client Acceptance and
Continuance
➢New client investigations
▪If previously audited, the new auditor is
required to communicate with the
predecessor auditor
▪Client permission required

➢Continuing clients
▪Annual evaluations whether to continue
based on issues, fees, and client integrity
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Identify Reasons for the Audit

➢Two major factors affecting acceptable risk

▪Likely statement users
▪Intended uses of the statements

➢Likely to accumulate more evidence for

companies that are
▪Publicly held
▪Have extreme indebtedness
▪Likely to be sold
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Obtaining an Understanding
with the Client
➢Engagement terms should be understood
between CPA and client.
➢Standards require an engagement letter
describing:
▪objectives
▪responsibilities of auditor and management
▪schedules and fees
➢Informs client that auditor cannot guarantee
all acts of fraud will be discovered
➢See figure 8-2
Page 10
Develop Overall Audit Strategy

➢Preliminary audit strategy should consider

▪client’s business and industry
▪material misstatement risk areas
▪number of client locations
▪past effectiveness of controls
➢Preliminary strategy helps auditor determine
resource requirements and staffing
▪staff continuity
▪need for specialists
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 Learning Objective 3

Gain an understanding of the client’s

business and industry.

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Understanding of the Client’s
Business and Industry
Client business risk is the risk
that the client will fail to meet
its objectives.

➢ Information technology

➢Global operations

➢Human capital

Page 13
Understanding of the Client’s Business
and Industry

Page 14
 Industry and External
Environment
Reasons for obtaining an understanding of the
client’s industry and external environment:

1. Risks associated with specific industries

2. Inherent risks common to all clients in
certain industries
3. Unique accounting requirements

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 Business Operations
and Processes
Factors the auditor should understand:

➢ Major sources of revenue

➢ Key customers and suppliers
➢ Sources of financing
➢ Information about related parties

Page 16
 Tour the Plant and Offices

Touring the physical facilities

enables the auditor to assess
asset safeguards and interpret
accounting data related to assets.

Page 17
 Identify Related Parties

➢Affiliated companies

➢Principal owners of the client

➢Any other party with which the client deals

➢A party who can influence management or

client policies

Page 18
Management and Governance
Governance includes:
Governance insights:
➢Organizational
➢Corporate charter
structure
and bylaws
➢Board activities
➢Code of ethics
➢Audit committee
➢Meeting minutes
activities.

Management establishes the strategies and

processes followed by the client’s business.

Page 19
 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.

Page 20
Client Objectives and Strategies

Strategies are approaches followed by the

entity to achieve organizational objectives.

Auditors should understand client objectives.

➢Financial reporting reliability

➢Effectiveness and efficiency of operations
➢Compliance with laws and regulations

Page 21
Measurement and Performance
The client’s performance measurement system
includes key performance indicators. Examples:

➢ market share ➢ Web site visitors

➢ sales per employee ➢ same-store sales
➢ unit sales growth ➢ sales/square foot

Performance measurement includes ratio analysis

and benchmarking against key competitors.

Page 22
 Learning Objective 4

Assess client business risk.

Page 23
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 misstatements in the financial
statements due to client business risk

Page 24
 Client’s Business, Risk, and
Risk of Material Misstatement

Page 25
 Sarbanes-Oxley Act

Management must certify it has designed

disclosure controls and procedures to
ensure that material information about
business risks is made known to them.

Management must certify it has informed

the auditor and audit committee of any
significant control deficiencies.

Page 26
 Learning Objective 5

Perform preliminary analytical procedures.

Page 27
 Preliminary Analytical
Procedures
Comparison of client ratios to industry
or competitor benchmarks provides an
indication of the company’s performance.

Preliminary tests can reveal unusual

changes in ratios.

Page 28
Examples of Planning Analytical Procedures

Page 29
 Summary of the Parts
of Auditing Planning
A major purpose is to gain an understanding
of the client’s business and industry.

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Planning an Audit and Designing
an Audit Approach
➢Set materiality and assess
acceptable audit risk
and inherent risk.

➢Understand internal control

and assess control risk

➢Gather information to assess fraud risks

➢Develop overall audit plan and audit program

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 Learning Objective 6

State the purposes of analytical procedures

and the timing of each procedure.

Page 32
 Analytical Procedures

AU 329 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

Page 33
 During the planning phase
◼ To assist in determining the nature, extent
and timing of audit procedures

◼ Data used:
– Unaudited trial balance
– Extensive analysis using Quarterly financial
statements

Page 34
 During the testing phase
◼ Done in conjunction with other audit
procedures.
Example: Tests of prepaid insurance

◼ The assurance provided by auditor

depends on:
– the precision of his/her expectations, and the
reliability of data used to build his her expectation
– the predictability of the relationship

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 During the completion phase
◼ For final review for material misstatements
of financial problems
◼ Done by knowledgeable senior partner.

Page 36
Timing and Purposes of
Analytical Procedures

Page 37
 Learning Objective 7

Select the most appropriate analytical

procedure from among the five major
types.

Page 38
 Five Types of Analytical
Procedures
Compare client data with:

1. Industry data
2. Similar prior-period data
3. Client-determined expected results
4. Auditor-determined expected results
5. Expected results using nonfinancial data.

Page 39
 1- Compare Client and Industry
Data
Client Industry
2009 2008 2009 2008
Inventory turnover 3.4 3.5 3.9 3.4
Gross margin 26.3% 26.4% 27.3% 26.2%

Page 40
1- Compare Client and Industry
Data
◼ Advantages:
– Understand client business
– Identify likelihood of financial failure

Disadvantages:
◼ Less likely to identify potential misstatements
◼ Difference in nature of client’s information and
industry information

Page 41
 2- Compare Client with similar
prior-period data
◼ Examples:

– Compare the current year’s balance with that

of the previous year
– Compare the details of a total balance with
similar detail for the previous year.
Table 8-2 next slide

– Compute ratios and percent relationships for

comparison with previous years
Common-size financial statements

Page 42
Internal Comparisons

Page 43
 2- Compare Client Data with Similar Prior
Period Data
2009 2008
(000) % of (000) % of
Prelim. Net sales Prelim. Net sales

Net sales $143,086 100.0 $131,226 100.0

Cost of goods sold 103,241 72.1 94,876 72.3
Gross profit $ 39,845 27.9 $ 36,350 27.7
Selling expense 14,810 10.3 12,899 9.8
Administrative expense 17,665 12.4 16,757 12.8
Other 1,689 1.2 2,035 1.6
Earnings before taxes $ 5,681 4.0 $ 4,659 3.5
Income taxes 1,747 1.2 1,465 1.1
Net income $ 3,934 2.8 $ 3,194 2.4

Page 44
3- Comparing client with client-
determined expected results
investigate the most significant differences
between budgeted and actual results as these
areas may contain potential misstatements.

◼ Two concerns:
– whether the budgets were realistic plans
– current financial information was changed by
client personnel.

Page 45
 4- Comparing client with auditor-
determined expected results
◼ The auditor calculates the expected
balance for comparison with the actual
balance
◼ Figure 8-8
Calculation of interest rates for both short-term
and long-term notes payable as a substantive test
of the reasonableness of recorded interest
expense.

Page 46
5- Comparing client with auditor-
determined expected results

◼ Hotel Total Revenues: from rooms by multiplying

the number of rooms, the average daily rate for each
room and the average occupancy rate.
◼ University tuitions: average tuition multiplied by
enrollment
◼ Factory Payroll: (total hours worked times the
wage rate.

Page 47
 Learning Objective 8

Compute common financial ratios.

Page 48
 Common Financial Ratios

➢ Short-term debt-paying ability

➢Liquidity activity ratios

➢Ability to meet long-term debt obligations

➢Profitability ratios

Page 49
Short-term Debt-paying Ability

(Cash + Marketable securities)

Cash ratio =
Current liabilities

(Cash + Marketable securities

Quick ratio = + Net accounts receivable)
Current liabilities

Current assets
Current ratio =
Current liabilities

Page 50
 Liquidity Activity Ratios

Accounts receivable Net sales

=
turnover Average gross receivables
Days to collect 365 days
=
receivable Accounts receivable turnover
Inventory Cost of goods sold
=
turnover Average inventory
Days to sell 365 days
=
inventory Inventory turnover
Page 51
Ability to Meet Long-term Debt
Obligation
Total liabilities
Debt to equity =
Total equity

Times interest Operating income

=
earned Interest expense

Page 52
 Profitability Ratios

Earnings Net income

=
per share Average common shares outstanding

Gross profit (Net sales – Cost of goods sold)

=
percent Net sales

Profit Operating income

=
margin Net sales

Page 53
 Profitability Ratios

Return on Income before taxes

=
assets Average total assets

Return on (Income before taxes

common = – Preferred dividends)
equity Average stockholders’ equity

Page 54
 Summary of Analytical
Procedures
Compare ratios of recorded amounts to
auditor expectations.

Used in planning to understand client’s

business and industry.

Used throughout the audit

➢to identify possible misstatements
➢reduce detailed tests
➢assess going-concern issues.

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End of Chapter