Question.3634 - Discussion Topic: When performing an audit, auditors are especially concerned about engagement risk. For this reason, they perform many activities to reduce engagement risks. Further, the auditing standards require auditors to understand the client's business, its environments, and its internal controls when planning the audit so that they could better plan the nature, timing, and extent of the audit. Required: 1. Discuss why the auditor would be concerned about engagement risk and identify two or more activities the auditors might perform to reduce engagement risk. 2. You should also discuss two methods, with examples, by which an auditor could get an understanding of an audit client and its environments, and how this understanding could be used in planning the nature, timing, and extent of the audit.
Answer Below:
1. Auditors and Engagement Risk: Engagement risk is the possibility that an auditor's relationship with a client could harm their reputation, cause them to lose money, or cause them to have legal issues (Whittington & Pany, 2022). Because engagement risk encompasses elements including the client's financial situation, the management's integrity, and the possibility of major misstatements, auditors are concerned about it. A high engagement risk may lead to inaccurate audit views, which could stain the auditor's reputation and land them in legal charges (Whittington & Pany, 2022). Actions to Lower the Risk of Engagement: Procedures for Accepting Clients: Auditors evaluate the engagement risk prior to accepting or pursuing a client by examining past audit outcomes and conducting background checks on the integrity of the management (Whittington & Pany, 2022). Engagement Letters: Sending out engagement letters lowers engagement risk by helping to precisely outline the audit's duties, obligations, and constraints. It also lessens the possibility of misunderstanding and lawsuits (Whittington & Pany, 2022). Techniques for Comprehending the Client and their Environment: Reviewing Industry and Regulatory Requirements: By examining industry rules and economic situations, auditors can obtain knowledge about the external environment of a client (Whittington & Pany, 2022). For instance, the auditor might be asked to become acquainted with HIPAA rules by a healthcare client. The knowledge aids auditors in defining the scope of audit operations and identifying important risk areas. Internal Control Assessments: Another method auditors learn is by analyzing the client's internal control systems (Whittington & Pany, 2022). Auditors determine how well the client's internal controls are working by conducting walk-throughs and interviews. Auditor attention may be drawn to poor internal controls, such as those in cash management, and testing scheduling and scope may be modified accordingly. Auditors can establish audit methods that are more responsive to recognized risks by developing a thorough understanding of the client and its environment. This will ensure that the nature, time, and extent of the audit are properly altered. References Whittington, O. R., & Pany, K. (2022). Principles of Auditing & Other Assurance Services (22nd ed.). McGraw-Hill Education.More Articles From Accounting
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