1. Chapter 8: Client Risk Profile and Documentation
Auditing: The Art and Science of Assurance Engagements
Chapter 8: Client Risk Profile and Documentation
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2. Chapter 8 Learning Objectives
Explain the importance of adequate audit planning.
Explain the components of understanding the client’s business and industry and assessing client business risk.
Describe the type of evidence that the auditor collects when developing the client risk profile and assessing client business risk.
Explain the purposes of working papers.
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3. Planning the Audit
According to CAS 300 the purpose of planning is to provide for effective conduct of the audit.
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4. CAS 300 The auditor must develop an audit plan that includes
the following components:
The nature, timing, and extent of audit procedures for the purpose of risk assessment.
The nature, timing, and extent of additional audit procedures, linked to the individual audit assertions.
Any other audit procedures that are needed for the audit to be conducted in accordance with GAAS (CASs).
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5. Develop Client Risk Profile
Client Risk Profile is developed to assess the client’s business risk and document portions of the audit risk model.
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6. Client Risk Profile
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7. Understand Client’s Business and Industry
The nature of the client’s business and industry affects client business risk and the risk of material misstatements in the financial statements.
CAS 315 requires the auditor to obtain knowledge of the entity’s business and environment in order to assess risks and conduct the audit.
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8. Industry and External Environment
Why is this necessary? 1. Many industries have unique accounting environments 2. Risks in the industry may affect the auditor’s assessment of audit risk for this client 3. Some inherent risks are common to all businesses in an industry
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9. Business Operations and Processes
The auditor should understand factors such as major sources of revenue, key customers and suppliers, sources of financing, and information about related parties that may indicate areas of increased client business risk.
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10. How to Obtain Knowledge of Client’s Business and Industry
Tour the plant and offices
Identify related parties
Review articles of incorporation and bylaws
Read minutes of directors’ meetings
Review significant contracts
Perform preliminary analytical procedures
Document control environment and corporate governance processes
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11. Discussion Problem 8-20, p. 261
Understand the business and industry for a car dealership.
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12. Management and Governance
An auditor should assess management’s philosophy and operating style and its ability to identify and respond to risk, as these significantly influence the risk of material misstatements in the financial statements.
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13. Objectives and Strategies
Auditors should understand client objectives related to: 1. Reliability of financial reporting. 2. Effectiveness and efficiency of operations. 3. Compliance with laws and regulations.
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14. Measurement and Performance
Performance measurement includes ratio analysis and benchmarking against key competitors.
As part of understanding the client’s business, the auditor should perform ratio analysis or review the client’s calculations of key performance ratios.
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15. Assess Client Business Risk
This is the risk that the client will fail to achieve its objectives.
Client business risk can arise from any of the factors affecting the client and its environment.
The auditor’s primary concern is the risk of material misstatements in the financial statements due to client business risk.
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16. Client Risk Profile Evidence Gathering
During the risk assessment process, the auditor uses primarily four of types of evidence:
Inquiries of management and others
Observation
Inspection
Analytical procedures
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17. Preliminary Analytical Review
Auditors perform preliminary analytical procedures to better understand the client’s business and to help assess client business risk.
One such procedure compares client ratios with industry or competitor benchmarks to provide an indication of the company’s performance.
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18. Related Parties What is a related party?
Why is it important to find out about related parties as part of our knowledge of business?
What could go wrong if we did not find out about related parties?
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19. Related Parties
A related-party transaction is any transaction between the client and a related party.
These transactions must be disclosed in the financial statements if they are material or information about them could affect decision making.
The auditor should identify all related parties and related-party transactions.
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20. Professional Judgment Problem 8-25, p. 264
Here’s an example of a possible related party situation.
How does this affect your audit opinion?
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21. Working Papers
According to CAS 230 working papers are the written or electronic audit documentation kept by the auditor to support audit conclusions;
Working papers aid the auditor in providing reasonable assurance that an adequate audit was conducted in accordance with GAAS.
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22. Purposes of Working Papers
Basis for planning the audit.
Record of the evidence accumulated and the results of the tests.
Data for determining the proper type of auditor’s report.
Basis for review.
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23. How are Working Papers Organized?
Each firm has its own approach for organizing working papers.
Organization will depend upon whether they are manual or electronic.
Depends upon the firm standards used for documentation: may be firm specific or standard approaches that can be purchases.
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24. Working Paper Contents and Organization
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25. Types of Working Paper Files
Permanent Files
Intended to contain data of a historical or continuing nature pertinent to the current examination.
These files provide a convenient source of information about the audit that is of continuing interest from year to year.
(Continued)
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26. Types of Working Paper Files (Continued)
Current Files
Include all working papers applicable to the year
under audit.
Much of this information is prepared and maintained electronically on secure systems.
(Continued)
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27. Types of Working Paper Files (Continued)
The types of information included in the current file are:
Risk assessment and materiality
Audit program
Overall planning information
Working trial balance
Adjusting and reclassification entries
Supporting schedules
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28. Standards for Preparing Working Papers
Properly identified
Well organized (indexed and cross-referenced)
Clearly indicate the work performed (including supervision)
Sufficient documentation to indicate that it meets the purpose for which it was prepared
Conclusions clearly stated
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29. Discussion Problem 8-22, p. 263 Let’s look at an example working paper
What have they done appropriately?
What is missing or what needs to be done differently?
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30. Ownership and Confidentiality of Working Papers
Ownership: auditor
Client documentation must be kept confidential: may be disclosed only to peer review, when subpoenaed, or in other circumstances with the consent of the client.
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