Audit Risk Model & Client Acceptance
11 important questions on Audit Risk Model & Client Acceptance
What are the procedures for client acceptance and retention?
- Obtain background information about the client
- Evaluate the risk factors or changes in risk factors associated with the client
- Communicate with predecessor auditors
- Decide on the acceptability or retention of the client as part of the firm-wide risk portfolio.
- Obtain an engagement letter
Why communicate with predecessor auditors?
- The reasons for auditor change
- The nature of any disagreements the predecessor had with management
- The identification of important risk areas, including any internal control weaknesses
- Any prior experience with fraud or illegal acts
- Arrangements for gaining access to the working papers from the prior-year audit
What are the key elements of an engagement letter?
- Confirm the acceptance of the appointment
- Identification of the service to be rendered: financial statement audit
- Identification of the financial reporting framework
- Specification of the responsibilities of management and auditor
- Deadlines: timing of audit work
- A description for the basis of the fees
- Reference the expected form and content of any reports to be issued by the auditor.
- The client has to inform the auditor by all relevant information
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What are the factors within the control of an auditor?
- Expertise & staffing
- Independence
What are the factor evaluated by the auditor?
- Integrity
- Accounting policies
- Reputation and image
- Financial status
- Profitability of the engagement
What are the types of independence and explain them?
- Independence in fact: between your ears
- Independence in appearance: how other perceive you as being independent
Which concepts of materiality are there and provide of each type of materiality the factors that influence the materiality level.
- Quantitative materiality: size of an item
- Percentage of the relevant base
- 10% of net income before taxes
- 5% of income from continuing operations
- 0.5% of total revenues
- Industry-specific guidance
- 1% of revenue in the real estate industry
- 0.5% to 2% of total expenses or revenues for not-for-profit organizations
- Qualitative materiality
- Nature of the item
- Effects on trends
- Changes a loss to income or vice versa
- Compliance with debt covenants
- Misstatements that increase management compensation
- Fraud or illegal acts
- Earnings management
What is audit risk?
Audit risk can be broken down in three components. Which are they?
- Inherent risk: that a material misstatement will even occur
- Control risk: that it would not be prevented or detected by client internal controls
- Detection risk: that it's not detected by the auditor's own procedures
Why does detection risk exist?
- Sampling risk: The auditor does not examine all transactions
- Non-sampling risk:
- The auditor may select ineffective procedures
- The auditor may apply procedures ineffectively
- The auditor may incorrectly evaluate the results of procedures
What is fraud risk?
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