Question

Write a paragraph about the potential risks involved with client acceptance. You can also consider the audit risk model and how it might apply to this firm of Wells Fargo & Co.

Answer 1

• RISKS INVOLVED WITH CLIENT ACCEPTANCE :

The audit engagement process involves decisions that are to be made by both , the prospective client and the auditor.There are certain risks associated with client acceptance and auditor needs to take into consideration all the risks. An auditor is obliged to maintain certain professional standards, objectivity and integrity while confirming a decision and while performing the audit as well. Professional standards suggest that auditor is required to perform all kinds of compliance and substantive tests and audit procedures for client acceptance decision. It has to be made sure that whether the risk management strategies opted by the auditor moderate the effect of risk on client acceptance decisions, thereby assisting auditors to bring prospective client relationships to an acceptable risk level. There must be selective use of risk management strategies taking into consideration all kinds of risks involved, based on the nature of the client. These risk management strategies increases the likelihood of accepting prospective clients.

• AUDIT RISK MODEL :

Audit risk model basically involves audit risk i.e. risk of providing incorrect judgement/opinion on the financial statements of the company. It involves 3 major components -

1. INHERENT RISK - It is the intrinsic risk of material misstatements already existing in the financial statements. It may be due to any error , omission, lack of internal control in the company etc.
2. CONTROL RISK - It is the risk of existence of material misstatements in the financial statements if the company due to irrelevant or lack of internal controls in the organisation.
3. DETECTION RISK - It is the risk that any kind of material misstatements may remain undetected by the auditors and auditors forming an opinion on the financial statements of the enterprise ignoring these misstatements.

So, basically an AUDIT RISK MODEL is used by the auditors to measure and manage the overall risk of management including those associated with the client acceptance.