Question

You are a manager in charge of training recently-hired audit associates. One of the associates, Elle, asks you to explain how the knowledge of a client’s business and industry affects the auditor’s assessment of risk. You decide to use AT LEAST two of the following companies to illustrate how a client’s business and industry relate to the various risks assessed in an audit:

1. Exxon
2. Amazon
3. Six Flags
4. Camping World

Prepare a short memo responding to Elle’s question. Assume this could eventually end up in training materials for your audit firm. Keep your response short (fewer than 200 words).

Answer 1

Knowing the client’s business helps us in a number of ways both during the conduct of the audit, and when we come to complete our work.

This includes, for example, helping us in :

Recognising errors in the financial statements

Asking the right questions and evaluating the reasonableness of the answers we receive

Making judgements about the appropriateness of the client’s accounting principles, policies and procedures

Identifying unusual or unexpected transactions and related party transactions

Interpreting the results of audit tests and evaluating their effect

Carrying out appropriate procedures to review events occurring after the balance sheet date

Carrying out an overall review of the financial statements.

Knowledge of the client’s business and the industry in which it operates is essential also to the development of a positive relationship and it helps us as follows :

In understanding the management’s philosophy and aspirations for the business

Understanding the business strategy and plans

Providing relevant and practical business advice to the client

Identifying areas in which the client might benefit from other professional services which we provide

NOW JUST RELATE IT TO THE INDUSTRY AND COMPANIES WRITTEN