ACCT4510 Topic 6**.docx

ACCT4510 Topic 6**.docx - ACCT4510 Auditing Topic 6 Risk...

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ACCT4510 Auditing Topic 6 Risk Assessment (I): Understanding the Client and Its Environment Lecture Outline Part A – Phases of an audit 1. What are the three phases of an audit? What are involved in each phase? section 3.1. Risk assessment assess the clients inherent risk and control risk Risk response check mostly on those high risk areas e.g. performance of detailed tests of control and substantive testing of transactions and accounts. Reporting based on your audit procedures, you prepare the audit report and truth and fairness opinion Part B – Understanding the Client 2. At the outset of every audit, an auditor must gain an understanding of their client. What aspects of the client and its environment should the auditor understand in order to assess the inherent risk ? section 3.2 & 3.6 & 3.7. (1) Economy Level (macro environment) a. Upturn or downturn? When economy is bad, companies may want to understate profit (Upturn: depends on management, Downturn: Depends on client. client may involve in fault to maintain profit. When economy is bad, some firm understate profit, save the profit for the good time, report more profit when economy become better) (2) Industry Level a. Level of competition -> if the industry is more competitive, there is more pressure on profits [higher chance for overstate the profit] b. Reputation of the firm in the industry-> if firm has bad reputation, consumers may not buy from the firm, therefore there will be pressures on profits and issues on going concern c. Government support or regulation in the industry-> these may have impacts on profits d. Level of demand for the goods- for example, are the goods subject to changing trend frequently?-> pressures on profits and going concern and also inventory may become obsolete soon (3) Entity Level (micro environment) a. Major customers -> are they satisfied? If not satisfied, they may not buy again and company will have going concern issue; Can they pay (assuming credit sales)? b. Major suppliers -> are goods being returned to suppliers? Did the company pay the suppliers timely? If not, suppliers may refuse to supply goods to the client who may have GC issue. c. Capacity to adapt to changes in technology and other trends -> If not, client will fall behind competitors, lose market shares -> pressure on profits and GC issues d. Any warranties provided to customers ? If yes, need to consider likelihood of goods being returned or repaired; any systemic fault (may affect customer’s satisfaction, reputation, and inventory value) e. Bargaining powers of customers or suppliers -> if customers and suppliers have great bargaining powers, profit margin and future viability may be at risk [customer have great bargaining power, ask for discount, and they may switch, putting pressure in our profit] [supplier have great bargaining power, ask for increase price] f. Operations -number and dispersion of locations -> this may affect the client’s ability to control and coordinate-> greater risk of errors in the financials[difficult to control if one branch in place A, one branch in place B g.
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