Week 4 Lecture 1 Before accepting a new client or continuing with an existing

Week 4 lecture 1 before accepting a new client or

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Week 4 Lecture 1 Before accepting a new client or continuing with an existing client: Obtain and review financial information Make inquiries of third parties such as bankers. Communicate with previous auditor. Evaluate your ability to audit the client o Technical skills o Knowledge of industry o Personnel Evaluate your independence. Continuation (issues, fees, and client integrity) Understanding the entity and its environment Industry (market, competition, seasonality) and regulated regulations (e.g. SkyCity – gambling licence) Nature of the entity o Operations (suppliers and customers) o Ownership and governance structure (sources of funding) o How entity is structured (related parties) Entity’s accounting policies. Objectives and strategies and related business risks. An auditor should assess Internal environment (employees) Local environment (competition) Global environment (regulatory/cultural) Business Risk - The risk that an entity’s business objectives will not be attained as a result of the external and internal factors, pressures and forces brought to bear on an entity and, ultimately, the risk associated with the entity’s survival and profitability. Not all business risks result in risks of material misstatement. Therefore, business risk is broader than the risk of material misstatement but includes it. The auditor is required to determine whether any identified risk is a ‘significant risk’, a risk of material misstatement that requires audit consideration.
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Major audit implications of business risk Expectations (sales growth?) Viability (going concern) Risk of material misstatement (assertion) Control environment (top management structure and incentives) Recommendations (suggestions?) Response to assessed risks More experienced staff assigned. Using experts. More supervision. Incorporating unpredictability into selection of further audit precedures. We are concerned about business risk because it may affect inherent risk. Identify risk of material misstatement The financial report level management (integrity, experience, pressure) The assertion level (problem accounts? judgement? unusual transactions? assets susceptible to loss?) Inherent risk “Susceptibility of account balance or class of transactions to material misstatement given inherent and environmental characteristics, but without regard to internal control” An assessment of IR and control risk (CR) can be combined or separate. Auditor is required to o Assess IR at financial report level from audit plan. o Assessment must then be related to assertions at account balance or class of transactions level when developing audit program. Inherent risk examples: Financial report level o Disputes with auditor in the past – management integrity o Management dominated by one person – management knowledge o Business declining – pressure on management o Hedging, obsolescence – nature of the business o New competitors – industry factors Assertion level o Errors in inventory valuations last year o Lease accounting is complex o Judgement needed for doubtful debts o Cash, alcohol, jewellery - assets susceptible to loss o
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