Bus 426 - Chapter 8

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Business Administration
BUS 426
Michael Favere- Marchesi

Chapter 8 -Client Risk Profile and Documentation  Phase 1: Have a clear understanding of the risks of material misstatement before accepting the client   Phase 2: Develop Client Risk Profile by understanding the client’s business and industry to access client business risk and to assess the risk of fraud overall  Understand client’s business and industry o Internal and External Environment  Risks associated with specific industries may affect the auditor’s assessment of client business risk  Certain inherent risks are common to all clients in certain industries, ex: Obsolete fashion goods  Many industries have unique accounting requirements that the auditor must understand o Business Operations and Processes  Auditor should understand the client’s major source of revenue, key customers, major suppliers, etc.  Tour of the office and plant  Identifying related parties to see if they are arms length  Examining the client’s technology infrastructure o Management and Governance  Legal documents to examine: Articles of incorporation, bylaws, minutes of board of directors and shareholders, contracts and code of ethics  Articles of Incorporation: Documents that recognizes a corporation as a separate entity  Bylaws: The rules and procedures adopted by a corporation’s shareholders, including the corporation’s fiscal year and duties of management  Consider the quality of management o Objectives and Strategies  Understand the client’s objectives related to reliability of financial reporting, effectiveness and efficiency of operations, compliance with laws and regulations o Measurement and Performance  Understand what the client uses to measure performance Chapter 8 -Client Risk Profile and Documentation  These performance measures may be tied to compensation values   Client Risk Profile Evidence Gathering  To gather evidence, the auditor uses 4 main types of evidence:  Inquiries of Management and Others  Observation  Inspection  Analytical Procedures   Preliminary Analytical Review  Audit team performs analytical procedures to better understand the client’s business  One way is to compare client ratios with industry or competitor ratios   Phase 3: The Audit Plan, the auditor moves to working with the audit risk model (Chapter 7)   Phase 4 and +… Then it becomes gathering evidence, combining, then issuing the a report for the financial statements   The Nature of Audit Working Papers  Working Papers: The written or electronic audit documentation kept by the auditor to support audit conclusions; these include risk assessments, procedures or tests performed, information obtained and conclusions reached  Purpose
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