This chapter explained the manner in which auditors plan an audit and design audit programs. To summarize:

• Investigating a potential audit client is essential because auditors want to avoid accepting clients that have unscrupulous management. As a part of their investigation, the auditors are required to communicate with the predecessor auditors. Arrangements for the engagement are set forth in the engagement letter, which makes clear the nature of the engagement, any limitations on the work, and the responsibilities of the client.

• Once the client has been accepted, the auditors will perform procedures to obtain a more detailed understanding of the client and its environment, and they will develop an overall audit strategy which considers both materiality and audit risk. The auditors must plan their audit to provide reasonable assurance that the financial statements are free from material misstatement, whether caused by error or fraud. The auditors' understanding of the client and its environment and planning analytical procedures will provide a basis for their identification and assessment of risks of material misstatement of the financial statements.

• Auditors are particularly concerned about fraud-both fraudulent financial reporting and misappropriation of assets. To identify fraud risks, the auditors have an audit team discussion of potential fraud, make inquires and perform analytical procedures, and consider the presence of fraud risk factors. The auditors react to fraud risks as they do to other risks of material misstatements, with an overall response or a modification of the nature, timing, and extent of audit procedures. However, the auditors are required in all audits to perform procedures to address the risk of management override of internal control.

• The planning process is documented with audit plans, time budgets, and audit programs. Audit programs generally include both a systems portion that focuses on the client's internal control and a substantive testing portion. The audit procedures that are contained in the audit program are designed around the assertions of management, which are embodied in the financial statements, and the auditors' assessments of risks and controls.

• Audit procedures should be responsive to the auditors' assessments of inherent risks of material misstatement of the financial statements. Inherent risks specify "what could go wrong" to cause a material misstatement of the financial statements, and audit procedures must be designed to detect the misstatement if it actually occurred.

• Subsequent to inherent risk assessment, the audit process consists of considering and testing the client's internal control, performing substantive tests, forming an opinion on the financial statements, and issuing the audit report.

Identify the factors considered by auditors in accepting new clients.

Explain a CPA's responsibilities when planning an audit.

Explain how the auditors assess a client's business risk and use these risks to determine inherent risks.

Describe the manner in which an audit is affected by the auditors' assessment of audit risk and materiality.

Describe how the auditors address fraud risk.

Explain how risks of material misstatement are linked to the nature, timing, and extent of audit procedures.

Distinguish between the systems portion of the audit program and the substantive test portion.

Describe the major steps in the audit process.