Question

A) Auditors often must request information from the client while completing various audit tasks. What are some of the issues that the auditors may encounter when requesting evidence from clients and how should they deal with those issues?

B) What is the difference between inherent risk and control risk? Why is it important that auditors not assume that a certain level of control risk exists when assessing inherent risk?

C) What were some of the risk factors that may impact the level of inherent risk for multiple (or all) accounts? What made these risk factors pervasive (i.e., why did they have the potential to impact multiple accounts)?

Answer 1

A) We often perform audits and wonder why, when they're complete, they didn't go very well.Through this I would like to discuss some of the issues that the auditors may encounter when requesting evidence from clients and how should they deal with those issues.

Common audit problems: No management support

When starting an audit, the first question we ask ourselves is, “Why are we doing this?” We may be performing the audit for compliance reasons, financial reasons, or because a procedure tells us that we must. All of these are good reasons, though we must understand that conducting audits is business tool that improves our quality system. How do we then convey to management, the CEO, or the board of directors that audits are an essential part of business processes and not something to resent and neglect?

To gain management support, we auditors must help managers understand that auditing is an important process that can help them. Below are some ways to help encourage executive managers to support the audit program.

Gaining management’s support

• Communicate the cost of audit observations.
• Explain the regulatory effects of nonconforming processes.
• Educate by stating or restating management’s role in the audit program.
• Distribute audit reports to management.
• Have a member of management participate in an audit.

B)

Difference between inherent risk and control risk

Inherent Risk	Control Risk
Inherent risk is the raw or untreated risk, i.e., the natural level of risk intrinsic in a business activity or process without implementing any procedures to reduce the risk.	Control risk is the probability of loss resulting from the malfunction of internal control measures implemented to mitigate risks.
Inherent risk is inevitable in nature.	Control risk only arises in the absence of effective internal control measures.
Inherent risk can be mitigated via implementation of internal controls.	Control risk can be mitigated via effective functioning of internal controls.

It is important that auditors not assume that a certain level of control risk exists when assessing inherent risk because auditors must determine risks when working with clients. One type of risk to be aware of is inherent risk. While assessing this level of risk, you ignore whether the client has internal controls in place (such as a secondary review of financial statements) in order to help mitigate the inherent risk. You consider the strength of the internal controls when assessing the client’s control risk. Your job when assessing inherent risk is to evaluate how susceptible the financial statement assertions are to material misstatement given the nature of the client’s business.

C)Some of the risk factors that may impact the level of inherent risk for multiple (or all) accounts are ,

• Rapid change: A business whose inventory becomes obsolete quickly experiences high inherent risk
• Prior-period misstatements: If company has made prior priod misstatement it will affect all accounts of current year.

These risk factors became pervasive because,

In case of every business inventory is the major part of its assets.If it became obsolete quickly this will effect the major part of companies assets.And more over this will effect the gross profit of the company which will effect the net profit also.Hence 'Rapid change' became pervasive.

When coming to the case of 'Prior-period misstatements' If a company has made mistakes in prior years that weren’t material (meaning they weren’t significant enough to have to change), those errors still exist in the financial statements. You have to aggregate prior-period misstatements with current year misstatements and this will effect the gross profit(Trading account), net profit (Profit and Loss Account) and reserve and surplus(Balance sheet). That is simply it became pervasive.