Question

Discussion Topic:

When performing an audit, auditors are especially concerned about engagement risk. For this reason, they perform main activities to reduce engagement risks. Further, the auditing standards require auditors to understand the client's business, and its environments, and its internal controls when planning the audit so that they could better plan the nature, timing, and extent of the audit.

Required:

1. Discuss why the auditor would be concerned about engagement risk and identify two or more activities the auditors might perform to reduce engagement risk.

2. You should also discuss two ways with examples, about how an auditor could get an understanding of an audit client and its environments, and how this understanding could be used in planning the nature, timing, and extent of the audit.  

Answer 1

Solution 1

1)An auditor would be concerned about the engagement risk throughout the audit process. Accepting an engagement with high risk tends to have a negative impact on the reputation of the auditors. The auditors may also suffer a financial loss.

A client which has a bad reputation or a client which is likely to close down its business and which has several litigation pending against it are examples of clients with a high engagement risk.

Therefore, in order to reduce such risks, an auditor would try to gain an understanding of the client's business before accepting the audit engagement. The auditor would perform a field visit, collect information through surveys or may consider the past records of the client.The auditor would reject the clients with high audit engagements.

If the auditor finds the engagement risky but acceptable, he would plan the audit procedures in such a way that it keeps the engagement risk at a low level. The auditor would plan the nature, timing and extent of audit procedures based on the assessed level of risks and deficiencies in the controls. Areas with high level of risk of material misstatements would be given high audit attention.

2) A lot of information can be obtained from the staff and other personnels working in the client's entity. Therefore an auditor prepares a questionnaire and gathers response from the staff and personnels. The information obtained by the auditor can be strengthened by performing a field visit and directly observing the internal controls and other processes.

The auditor can also refer to the past records and audit reports of the client in order to understand the client's business and its environment. With the past audit reports, an auditor would be able to understand the potential issues those were reported earlier. The auditors tend to focus on these areas and check for the existence of the potential issues earlier detected.

Apart from these, an auditor may collect information from external sources.

Based on the information obtained by performing the above procedures the auditor would be able to gain an understanding of the client's business and its environment.

The auditor would extend the nature, timing and extent of the audit if the responses he gathered from the staff and personnel indicates weakness or deficiencies in controls and other processes and if several issues were reported in the past years. Higher the risk, greater would be the timing and extent of audit.