Engagement Risk
Summary
TLDRThe auditor must evaluate various risk factors when considering a new client, such as the client's financial stability, economic climate, and business model. They also assess the likelihood of financial reporting errors and the potential impact of restatements. The audit firm considers the client's location, internal controls, and the firm's own resources and independence. The audit risk determines the fees charged, which in turn affects the audit quality. Independence is crucial, and if lacking, the engagement cannot proceed.
Takeaways
- đ Auditors must consider various risk factors beyond the auto-risk model when accepting a new client.
- đŒ The client's ability to survive economically is crucial for the auditor as it impacts bill payments and the firm's reputation.
- đ Evaluating the economic climate, technological impact, competition, business development, and geographic location is essential for risk assessment.
- đą The client's business model and the audit firm's business risks are intertwined, affecting the decision to accept the client.
- đĄ Financial reporting risk involves assessing the likelihood of overstatement and the potential impact of a restatement.
- đ Integrity, incentives, and internal controls of the client are critical factors in determining the quality of the company and the audit engagement.
- đŒ The audit firm seeks to associate with high-quality companies to ensure mutual benefits from the audit engagement.
- đ” Audit fees are determined based on the assessed audit risk, which in turn influences the resources allocated to the audit.
- âïž Independence is a non-negotiable requirement for auditors; lacking it disqualifies the firm from accepting the engagement.
- đ ïž Competence can be addressed through hiring new personnel or using specialists, but independence issues cannot be resolved.
Q & A
What are the typical risk factors an auditor considers when accepting a new client?
-The auditor considers factors beyond the auto-risk model, including the client's business viability, economic survival, and the potential for bankruptcy which could affect the audit firm's reputation.
Why is the client's ability to survive economically important to the audit firm?
-The client's economic survival is important because it ensures they can pay the bills, and bankruptcy could lead to reputational damage for the audit firm.
What external factors might an auditor consider when evaluating a client's business?
-The auditor might consider the economic climate, technological impact, competition, business model, and geographic location of the client's operations.
How does the geographic location of the client and audit firm affect the audit engagement?
-If the client and audit firm are not in the same geographic region, it could introduce additional business risks, potentially making them a poor fit for each other.
What is financial reporting risk and why is it important in the audit process?
-Financial reporting risk refers to the likelihood of overstatement in financial reports and the potential impact of restatements. It's important because it helps the auditor assess the quality of the client's financial reporting.
What factors does an auditor consider when determining the complexity of a client's financial reporting?
-An auditor considers the client's integrity, incentives, and internal controls to assess the complexity of financial reporting.
Why is it beneficial for an audit firm to associate with high-quality companies?
-Associating with high-quality companies that do good work benefits everyone involved, as it enhances the reputation of the audit firm and ensures a more successful audit process.
How does the audit firm determine the audit fees to charge a client?
-The audit firm determines the audit fees based on the assessed audit risk, which in turn affects the resources allocated to the audit engagement.
What questions does an audit firm ask regarding the availability of resources for an audit?
-The audit firm asks whether the client can provide sufficient resources for the audit, as the lack of resources could make the firm and client a poor fit.
Why is independence necessary for an audit firm to engage in an audit?
-Independence is necessary to ensure the objectivity and integrity of the audit process. Without independence, the audit firm cannot accept the engagement.
How can an audit firm address a lack of competence in handling an audit engagement?
-An audit firm can address a lack of competence by using specialists or hiring new personnel to gain the necessary expertise.
Is it possible for an audit firm to address a lack of independence?
-Lacking independence cannot be addressed, as it is a fundamental requirement for the audit firm to perform an audit.
Outlines
đ Client Acceptance and Risk Assessment
The auditor must consider various risk factors when accepting a new client, beyond the standard auto-risk model. These factors include the client's ability to survive economically, which is crucial for the audit firm's revenue. Additionally, the client's bankruptcy could lead to reputational damage for the firm. The auditor also evaluates the economic climate, technological impact, competition, industry development, business model, and geographical location of the client. These factors influence the audit firm's decision on whether to engage with the client. The financial reporting risk is assessed by estimating the likelihood of overstatement and the potential impact of a restatement. The auditor seeks to associate with high-quality companies to ensure mutual benefits. The engagement risk is determined by combining the business risk and financial reporting risk. Once the audit risk is assessed, the audit fees are set, which affects the resources allocated to the audit. The client's willingness to provide sufficient resources is a determining factor for the audit firm's engagement. The firm also questions its independence at the outset and may need to address any lack of competence or independence, with the latter being a non-negotiable aspect.
Mindmap
Keywords
đĄRisk factors
đĄAuto-risk model
đĄEconomic climate
đĄTechnology impact
đĄCompetition
đĄBusiness model
đĄGeographic region
đĄFinancial reporting risk
đĄAudit fees
đĄIndependence
đĄCompetence
Highlights
Auditors must consider various risk factors beyond the auto-risk model when accepting a new client.
The client's ability to survive economically is crucial for the audit firm.
Bankrupt clients can cause reputational damage to the audit firm.
Economic climate and technological impact are factors considered in client assessment.
Competition, development, and business model of the client are important for the audit firm.
Geographic location of the client and firm can influence the business fit.
Financial reporting risk involves the likelihood of overstatement and potential restatement.
Complexity of the client, integrity, and internal controls are assessed for audit risk.
Audit firms prefer to associate with high-quality companies for mutual benefit.
Engagement risk is determined by combining business and financial reporting risks.
Audit risk assessment influences the audit fees charged to the client.
Sufficient resources from the client are necessary for a successful audit.
Audit firms must ensure independence before engaging in an audit.
Lack of independence is a deal-breaker for audit engagements.
Competence can be addressed by hiring specialists or new personnel.
Independence issues are non-negotiable and cannot be resolved post-acceptance.
Transcripts
in accepting a new client the auditor
would need to consider a number of risk
factors beyond the typical
factors we consider the auto-risk model
for example the client and the other
would have to consider the client's
business for us that is the risk that
the client will not be able to survive
economically that's important to us
because we need them to pay the bills
clients that go bankrupt also incur
reputational damage to the firms
being associated with firms that are
suffering economic harm
some of the factors we might look at too
is the economic climate
how technology is impacting this
particular company their competition
their field
development their business model and
where they're operating
each of these are going to implement
business work to the audit firm as well
for example if the client and firm are
not located in the same geographic
region it wouldn't necessarily be a good
fit as there would be business risks to
the firm
too um now when we consider the
financial reporting risk
we're going to look at what's the
likelihood that there's going to be
overstatement
and so and if there is a restatement how
big a deal it will be so
complexity of the client integrity
incentives
internal controls we want to associate
ourselves with high quality companies
that are doing good work
because it benefits everyone and so
combine these two will help us assess
the engagement risk from the engagement
risk we'll determine the audit risk
after we've assessed the audit risk we
need to determine the audit fees we're
going to charge the client
this is an important consideration
because it will determine the resources
we have to engage in the audit
if the client will not provide
sufficient resources to engage in an
audit then
we're not a good fit the audit firm will
have to ask certain questions like
at the stage too do we have the
independence necessary to
engage in the audit if we don't have the
independence we can't engage
accept this engagement if we lack the
confidence then what we need to do
is decide if we can gain sufficient
confidence to engage in audit that might
be using a specialist
that might be hiring new personnel so
lacking
competence can be addressed lacking
independence can never be addressed
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