Discuss the audit risks associated with accepting and undertaking this new audit engagement
Engagement risk is the overall risk associated with an audit engagement. It can include a loss of reputation from being associated with a particular client, and financial losses from the association. Engagement risk tends to increase when a client is in a weak financial condition, and especially when it will likely require additional financing in order to survive. In this situation, the client is more likely to go bankrupt, in which case its investors and creditors will be more likely to drag the auditor into any subsequent litigation. Show
When the auditor is risk-averse, as is more likely to be the case with a large and well-established firm, it is more likely that engagements with high levels of engagement risk will be rejected. Conversely, a newer audit firm that wants to aggressively pursue new business might be more inclined to take on a client with high engagement risk, as long as it expands its audit procedures to offset the risk. The auditor examines only those controls that are relevant to the engagement risk assessment. This means that the auditor can exclude an examination of the controls associated with certain operating units and business functions when they do not have a direct impact on the financial statements. Instead, the auditor focuses on those controls that can prevent, detect, or correct material misstatements within the client’s financial statements. Introduction.01 This standard establishes requirements regarding planning an audit. Objective.02 The objective of the auditor is to plan the audit so that the audit is conducted effectively. Responsibility of the Engagement Partner for Planning.03 The engagement partner1 is responsible for the engagement and its performance. Accordingly, the engagement partner is responsible for planning the audit and may seek assistance from appropriate engagement team members in fulfilling this responsibility. Engagement team members who assist the engagement partner with audit planning also should comply with the relevant requirements in this standard. Planning an Audit.04 The auditor should properly plan the audit. This standard describes the auditor's responsibilities for properly planning the audit.2 .05 Planning the audit includes establishing the overall audit strategy for the engagement and developing an audit plan, which includes, in particular, planned risk assessment procedures and planned responses to the risks of material misstatement. Planning is not a discrete phase of an audit but, rather, a continual and iterative process that might begin shortly after (or in connection with) the completion of the previous audit and continues until the completion of the current audit. Preliminary Engagement Activities.06 The auditor should perform the following activities at the beginning of the audit:
Planning Activities.07 The nature and extent of planning activities that are necessary depend on the size and complexity of the company, the auditor's previous experience with the company, and changes in circumstances that occur during the audit. When developing the audit strategy and audit plan, as discussed in paragraphs .08-.10, the auditor should evaluate whether the following matters are important to the company's financial statements and internal control over financial reporting and, if so, how they will affect the auditor's procedures:
Audit Strategy.08 The auditor should establish an overall audit strategy that sets the scope, timing, and direction of the audit and guides the development of the audit plan. .09 In establishing the overall audit strategy, the auditor should take into account:
Audit Plan.10 The auditor should develop and document an audit plan that includes a description of:
Multi-location Engagements.11 In an audit of the financial statements of a company with operations in multiple locations or business units,13 the auditor should determine the extent to which audit procedures should be performed at selected locations or business units to obtain sufficient appropriate evidence to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. This includes determining the locations or business units at which to perform audit procedures, as well as the nature, timing, and extent of the procedures to be performed at those individual locations or business units. The auditor should assess the risks of material misstatement to the consolidated financial statements associated with the location or business unit and correlate the amount of audit attention devoted to the location or business unit with the degree of risk of material misstatement associated with that location or business unit. .12 Factors that are relevant to the assessment of the risks of material misstatement associated with a particular location or business unit and the determination of the necessary audit procedures include:
.13 In determining the locations or business units at which to perform audit procedures, the auditor may take into account relevant activities performed by internal audit, as described in AS 2605, Consideration of the Internal Audit Function, or others, as described in AS 2201. AS 2605 and AS 2201 establish requirements regarding using the work of internal audit and others, respectively. .14 AS 1205, Part of the Audit Performed by Other Independent Auditors, describes the auditor's responsibilities regarding using the work and reports of other independent auditors who audit the financial statements of one or more of the locations or business units that are included in the consolidated financial statements.18 In those situations, the auditor should perform the procedures in paragraphs .11-.13 of this standard to determine the locations or business units at which audit procedures should be performed. Changes During the Course of the Audit.15 The auditor should modify the overall audit strategy and the audit plan as necessary if circumstances change significantly during the course of the audit, including changes due to a revised assessment of the risks of material misstatement or the discovery of a previously unidentified risk of material misstatement. Persons with Specialized Skill or Knowledge.16 The auditor should determine whether specialized skill or knowledge is needed to perform appropriate risk assessments, plan or perform audit procedures, or evaluate audit results. .17 If a person with specialized skill or knowledge employed or engaged by the auditor participates in the audit, the auditor should have sufficient knowledge of the subject matter to be addressed by such a person to enable the auditor to:
Additional Considerations in Initial Audits.18 The auditor should undertake the following activities before starting an initial audit:
.19 The purpose and objective of planning the audit are the same for an initial audit or a recurring audit engagement. However, for an initial audit, the auditor should determine the additional planning activities necessary to establish an appropriate audit strategy and audit plan, including determining the audit procedures necessary to obtain sufficient appropriate audit evidence regarding the opening balances.19 Appendix A - Definition.A1 For purposes of this standard, the term listed below is defined as follows: .A2 Engagement partner - The member of the engagement team with primary responsibility for the audit. What are the risks associated with an audit process?There are three common types of audit risks, which are detection risks, control risks and inherent risks. This means that the auditor fails to detect the misstatements and errors in the company's financial statement, and as a result, they issue a wrong opinion on those statements.
What issues should the auditor consider before accepting the new engagement?Assuming independence and requisite technical abilities, the pre- acceptance evaluation of a prospective audit engagement normally focuses on three factors: 1) personal integrity of the prospective client's management and principals, 2) presence of circumstances pointing towards unusual risks in the engagement or ...
What is engagement risk in auditing?What is Engagement Risk? Engagement risk is the overall risk associated with an audit engagement. It can include a loss of reputation from being associated with a particular client, and financial losses from the association.
How is audit risk related to engagement risk?Entity business risk, auditor business risk and audit risk threaten the reputation and effectiveness of the audit firm and contribute to overall engagement risk, which is the risk that an audit faces from association with a particular client.
|