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Flashcards in Week 3 Deck (13):
1

Risk Assessment
What & how much evidence needs to be gathered?

Preplanning
Carefully select your clients

Client Risk Profile
Understand your client & their industry

Plan the Audit
Based on the audit risk model
Design Audit Procedures

2

Preliminary Risk Identification

Understand the Client
Identify Related Parties
Fraud Risk
Going Concern Risk
Corporate Governance
Understand Internal Controls
Understand IT Environment
Significant Accounts
Significant Classes of Transactions
Closing Procedures
Materiality

3

Understand Client to Assess Risk

Purpose: to assess risk of F/S having a material misstatement

Need to gain knowledge of client at:
Entity level – it’s operations, it’s management, it’s IT environment, etc.
Industry level – highly competitive, amount of regulation, etc.
Economic level – pressures, susceptibilities

4

Steps to Understand Client

Make inquires
Management
Financial & non-financial staff at all levels

Perform analytical procedures
Looking for unusual relationships

Perform observation & inspection procedures
Take a tour of the facilities
Read management reports, minutes from BOD meetings

5

Fraud: The Basics

Definition
Intentional error

Types
Financial Reporting – misstatement
Theft of physical assets – cash, inventory, fixed assets

Sources
Management – most difficult to detect
Employee
Computer
External

6

Conditions for Fraud

Incentive/Pressure
Opportunity
Rationalization/Attitude

If any of these conditions exist, then there is risk of fraud occurring exists.

7

Our Fraud responsibilities

What
Defines our responsibilities
Provides guidelines

Why
An expectation gap exists
Next to impossible task

How
Use professional skepticism at all times
Discuss potential risks, document & respond
Must make inquiries to management

8

Potential Risk Factors

Related Parities
Going concern
Corporate Governance
Information Technology
Closing Procedures

9

Related Parities

May take place under favourable terms
Specific disclosure requirements & increase RMM

10

Going concern

Key assumption that the business will continue to operate for 12 months
Need to be on the look out for signs and if suspect then additional evidence needs to be gathered
CAS 570 requires a para. in audit report for material uncertainty

11

Corporate Governance

Structures put in place to guide and control the organization
A key element of internal control - The Control Environment
“Tone at the Top”

12

Information Technology

Level of reliance on IT
Effectiveness of IT environment – general and application controls
Have significant changes occurred and associated risks

13

Closing Procedures

Ability of client to accurately prepare the F/S
The amount of professional judgement involved in adjusting entries
Pressures to smooth F/S results