Ocean Manufacturing
Case 1.1 – Client Acceptance
Question # 1: Identify 5 procedures an auditor should perform in determining whether to accept a client. Which of these five are required by the auditing standards? a. (AU 314) The auditor should obtain an understanding of the entity and its environment in the following areas: i. Client’s application of accounting policies ii. The industry, regulation and other factors affecting the client iii. Client’s objectives , strategies, and related business risks iv. Methods used by the client to measure and review performance v. The client’s internal control
The second standard of fieldwork requires that the auditor obtain a sufficient understanding of the entity and its environment, including internal control, in order to assess the risk of material misstatements.
The auditor should assess the inherent risk factors about the client by learning about the industry, regulations, etc as listed above. The auditor should also try to assess the control risk factors. Were transactions subject to management override? If they were, then internal controls are less effective. Thus, internal control is less reliable and internal control should be high. Further, it may take more work to reduce the audit risk to an acceptable level. b. (AU 315.09) The successor auditor should make specific and reasonable inquiries of the predecessor auditor regarding matters that will assist the successor auditor in determining whether to accept the engagement. vi. Management integrity. vii. Disagreements with management and prior auditors. viii. Communications to audit committees. ix. Reasons for the change of auditors.
Material errors and irregularities are more likely to exist when the management is dishonest. The auditors are required to document their communication to the prior auditors. c. Proper supervision and assess competence to perform the audit.
Question # 1: Identify 5 procedures an auditor should perform in determining whether to accept a client. Which of these five are required by the auditing standards? a. (AU 314) The auditor should obtain an understanding of the entity and its environment in the following areas: i. Client’s application of accounting policies ii. The industry, regulation and other factors affecting the client iii. Client’s objectives , strategies, and related business risks iv. Methods used by the client to measure and review performance v. The client’s internal control
The second standard of fieldwork requires that the auditor obtain a sufficient understanding of the entity and its environment, including internal control, in order to assess the risk of material misstatements.
The auditor should assess the inherent risk factors about the client by learning about the industry, regulations, etc as listed above. The auditor should also try to assess the control risk factors. Were transactions subject to management override? If they were, then internal controls are less effective. Thus, internal control is less reliable and internal control should be high. Further, it may take more work to reduce the audit risk to an acceptable level. b. (AU 315.09) The successor auditor should make specific and reasonable inquiries of the predecessor auditor regarding matters that will assist the successor auditor in determining whether to accept the engagement. vi. Management integrity. vii. Disagreements with management and prior auditors. viii. Communications to audit committees. ix. Reasons for the change of auditors.
Material errors and irregularities are more likely to exist when the management is dishonest. The auditors are required to document their communication to the prior auditors. c. Proper supervision and assess competence to perform the audit.