Are there long term contracts with customers major

• Are there long term contracts with customers?
• Major suppliers
• Are they reputable? Supply quality goods on timely basis? Overseas
or domestic?
• Does client pay supplier accounts on timely basis?
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FAC823: Enterprise Risk Management
& Internal Control ….. 2021/T Penney

Gaining an Understanding of a Client
• Entity level (continued)
• Employment contracts, relations with employees
• Nature and complexity of payment, unionization
• How happy are staff? Risk of disruption?
•
Sources of financing
• Reliability of funding, structure of debt
• Ability to meet interest and principal payments
• Restrictions in debt contracts
• Ownership structure
• Rights of shareholders, dividend policy and payments
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FAC823: Enterprise Risk Management
& Internal Control ….. 2021/T Penney

Gaining an Understanding of a Client
• Industry level
• Understanding the client’s position in the industry, competitive
pressures, government support, overall demand for products
• What risks to client arise from nature of industry and client’s
position within it?
• Compare client to national and international competitors
• Auditor may have special industry expertise and knowledge
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FAC823: Enterprise Risk Management
& Internal Control ….. 2021/T Penney

Gaining an Understanding of a Client
• Industry level ( continued)
• Competitive pressure on client’s profits, ability to withstand
industry downturn
• Client’s reputation relative to competitors, risk of losing business
and profits
• Level of government support for industry and impact of
government regulation
• Overall level of demand for industry goods and services – impact
on revenue, impact of technological changes
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FAC823: Enterprise Risk Management
& Internal Control ….. 2021/T Penney

Gaining an Understanding of a Client
• Economy level
• How do overall economic conditions affect client?
FAC823: Enterprise Risk Management
& Internal Control ….. 2021/T Penney
• What are specific pressures on client to understate or overstate
profits in these conditions?
36

Gaining an Understanding of a Client
• Related parties
• Identification and appropriate disclosure of a client’s related
parties
• Examples of related parties include: parent companies, subsidiaries,
joint ventures, associates, company management ,and close family
members of key management
• Lack of independence may lead to transactions outside of the
normal course of business
• This increases the susceptibility of the financials statements to
fraud and error
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FAC823: Enterprise Risk Management
& Internal Control ….. 2021/T Penney

Gaining an Understanding of a Client
• Related parties (continued)
• Specific requirements for the auditor (Canadian Auditing
Standard (550) include
:
• A team discussion of susceptibility of the financial statements
to fraud and errors as a result of these relationships
• Ask management to identify all related parties including
details of the nature, type and purpose of transactions
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FAC823: Enterprise Risk Management
& Internal Control ….. 2021/T Penney