On September 3, 20X1, Larkin, CPA, was engaged to audit the financial statements of Precious Metals Company (PM), for the year ended October 31, 20X1. PM purchases precious metals at wholesale prices and resells them to craft clubs at retail. PM is a new client whose common stock was first offered to the public five years ago. PM received an unqualified opinion on its financial statements in each of the prior three years, but changes auditors after each engagement. In accepting the engagement, Larkin completed all of the appropriate client acceptance procedures.

Larkin instructed Johnson, an assistant on the engagement, to draft a planning checklist that would assist Larkin in preparing the audit staff for the fieldwork that is scheduled to begin on October 17, 20X1. On October 5, 20X1, Johnson prepared the planning checklist below (engagement letter points have been omitted).

I. Understanding the engagement

In planning the audit, have the engagement personnel considered:

1. PM's accounting policies and procedures? -Appropriate

2. Financial statement items likely to require adjustment?- Appropriate

3. Whether the method of sampling is likely to be approved by PM?- Inappropriate

II. Knowledge of the entity's business

Has an overall understanding of PM's operations been obtained by reviewing:

4. Successor auditor's working papers?- Inappropriate

5. Financial statements and interim financial statements?- Appropriate

6. Factors affecting the risk of misstatements due to error or fraud?- Appropriate

III. Assessing risk

7. Has detection risk been appropriately restricted to determine how much inherent risk can be accepted?- Inappropriate

8. Has consideration been given to permitting PM's internal auditors to make the assessment of inherent risk and evaluations of significant accounting estimates?-Inappropriate

IV. Illegal acts

Have the following matters been considered in assessing the risk that PM has not complied with laws and regulations that have a direct and material effect on the financial statements:

9. PM's policy relative to the prevention of illegal acts?- Appropriate

10. PM's understanding of the requirements of laws and regulations pertinent to its business?- Appropriate

11. Obtaining management's written assurance that no employees have committed any illegal acts of any type?- Appropriate

Direction

Justify each planning checklist, why it is an appropriate/inappropriate option and

• describe how risk assessments influence an audit strategy
• describe applicable audit strategies for a given engagement