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Copyright 2014 Pearson Education 8-1 Chapter 8 Audit Planning  Review Questions 8-1 There are three primary benefits from planning audits it helps the auditor obtain sufficient appropriate evidence for the circumstances, helps keep audit costs reasonable, and helps avoid misunderstandings with the client. 8-2 Eight major steps in planning audits are 1. Accept client and per initial planning 2. Understand the client’s business and industry 3. Assess client business risk 4. Per preliminary analytical procedures 5. Set materiality, and assess acceptable audit risk and inherent risk 6. Understand internal control and assess control risk 7. Gather ination to assess fraud risks 8. Develop overall audit strategy and audit program 8-3 The new auditor successor is required by auditing standards to communicate with the predecessor auditor. This enables the successor to obtain ination about the client so that he or she may uate whether to accept the engagement. Permission must be obtained from the client before communication can be made because of the confidentiality requirement in the Code of Professional Conduct. The predecessor is required to respond to the successor’s request for ination; however, the response may be limited to stating that no ination will be given. The successor auditor should be wary if the predecessor is reluctant to provide ination about the client. 8-4 Prior to accepting a client, the auditor should investigate the client. The auditor should uate the client’s standing in the business community, financial stability, and relations with its previous CPA firm. The primary purpose of new client investigation is to ascertain the integrity of the client and the possibility of fraud. The auditor should be especially concerned with the possibility of fraudulent financial reporting since it is difficult to uncover. The auditor does not want to needlessly expose himself or herself to the possibility of a lawsuit for failure to detect such fraud. 8-5 Auditing standards require auditors to document their understanding of the terms of the engagement with the client in an engagement letter. The engagement letter should include the engagement’s objectives, the responsibilities of the auditor and management, and the engagement’s limitations. An engagement letter is an agreement between the CPA firm and the client concerning theCopyright 2014 Pearson Education 8-2 8-5 continued conduct of the audit and related services. It should state what services will be provided, whether any restrictions will be imposed on the auditor’s work, deadlines for completing the audit, and assistance to be provided by client personnel. The engagement letter may also include the auditor’s fees. In addition, the engagement letter ins the client that the auditor cannot guarantee that all acts of fraud will be discovered. 8-6 Because the Sarbanes–Oxley Act of 2002 explicitly shifts responsibility fo