ACCT3708 Tutorial Week 3
ACCT3708 Week 3 Tutorial
Q1. What is the link between audit risk and engagement risk? How does the audit risk model allow the auditor to deal with these risks in the most cost effective manner?
Audit risk is the risk that the auditor gives the wrong opinion – this can either be stating errors when there are none or when there are errors stating that there are none. This risk cannot be eliminated as auditors can only provide a reasonable assurance and not absolute, but instead this can only be managed and reduced to a minimum.
Engagement risk is the risk of the consequences of giving a wrong opinion to occur. Consequences include legal action against the auditor and loss of reputation of the auditor and lower fees charged.
The link between these two risks is that the lower the audit risk, the lower the engagement risk. If the risk of giving a wrong opinion is minimal, so is the risk of facing consequences of making the error.
Reducing audit risk requires more resources to conduct better audits. Auditor must design an audit strategy so that the benefits of reduced engagement risk outweigh additional costs of more auditing. Generally, the risk based auditing approach is used – concentrate on the parts of the financial statements that require more work.
Q2. Discuss the procedures that should be followed and the matters that should be considered when accepting a new audit engagement
The basic audit process is:
Decide whether to accept or decline the process
Decline if:
Too risky – or charge higher fees
Auditor audits client’s competitor – might disclose sensitive information
The auditor might not have enough staff
Auditor does not have expertise in the client’s industry
The fee is too low – auditor will lose money through the engagement. companies sometimes use the auditor’s brand name
Engagement letter
Assess the risk of the client
Collect sufficient appropriate audit evidence
Form and issue an audit opinion
Q3. What would you include in an engagement letter?
What
Q1. What is the link between audit risk and engagement risk? How does the audit risk model allow the auditor to deal with these risks in the most cost effective manner?
Audit risk is the risk that the auditor gives the wrong opinion – this can either be stating errors when there are none or when there are errors stating that there are none. This risk cannot be eliminated as auditors can only provide a reasonable assurance and not absolute, but instead this can only be managed and reduced to a minimum.
Engagement risk is the risk of the consequences of giving a wrong opinion to occur. Consequences include legal action against the auditor and loss of reputation of the auditor and lower fees charged.
The link between these two risks is that the lower the audit risk, the lower the engagement risk. If the risk of giving a wrong opinion is minimal, so is the risk of facing consequences of making the error.
Reducing audit risk requires more resources to conduct better audits. Auditor must design an audit strategy so that the benefits of reduced engagement risk outweigh additional costs of more auditing. Generally, the risk based auditing approach is used – concentrate on the parts of the financial statements that require more work.
Q2. Discuss the procedures that should be followed and the matters that should be considered when accepting a new audit engagement
The basic audit process is:
Decide whether to accept or decline the process
Decline if:
Too risky – or charge higher fees
Auditor audits client’s competitor – might disclose sensitive information
The auditor might not have enough staff
Auditor does not have expertise in the client’s industry
The fee is too low – auditor will lose money through the engagement. companies sometimes use the auditor’s brand name
Engagement letter
Assess the risk of the client
Collect sufficient appropriate audit evidence
Form and issue an audit opinion
Q3. What would you include in an engagement letter?
What