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Comprehensive Risk Assessment and Documentation Guidelines for Audit Engagements

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Learn about Sarah Winchester's legacy in risk assessment standards and documentation requirements for audit engagements. Understandings, engagements, significant risks, and communication guidelines are detailed for effective audit procedures.

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Comprehensive Risk Assessment and Documentation Guidelines for Audit Engagements

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  1. RISK ASSESSMENT STANDARDS SAS 103-114 DOCUMENTATION REQUIREMENTS

  2. SARAH WINCHESTER’S LEGACY

  3. FOUR MAIN FOCUS AREAS • Understanding – the client, the environment, the processes • Meetings - staff discussion on fraud and the risk of material misstatement • Actions - things we are supposed to do • Communications-with management and those charged with governance

  4. UNDERSTANDINGS TO DOCUMENT • Engagement Letter • Services to be performed • Objectives of the engagement • Management’s responsibilities • Auditor’s responsibilities • Limitations of the engagement • Other considerations

  5. ENGAGEMENT ACCEPTANCE AND CONTINUANCE • Evaluate the prospective or continuing client relationship • Evaluate the audit firm’s independence • Commercial questionnaires are available • PPC • Wiley • AICPA ppc.thomson.com

  6. Entity, Environment, Internal Control • Use risk assessment procedures to gather and document understanding: • Inquiry • Observation • Preliminary Analytical Procedures • Inspection REMEMBER! Inquiry Alone is not Sufficient!

  7. ASPECTS TO CONSIDER • Industry, Regulatory, External Factors • Market & competitors • Cyclical or seasonal activities • Technology changes • Availability and cost of supplies • Regulatory requirements and changes • General overall economic conditions • Availability and cost of credit

  8. NATURE OF THE ENTITY • Key customers, clients, suppliers • Geographical locations • Types of products, revenues • Number of employees • Compensation arrangements • Related party transactions • Sources of financing

  9. BUSINESS RISKS • Industry developments • Technology • Skilled labor force

  10. BUSINESS RISKS • New Products • Warranties • Liabilities

  11. RESULTS OF OPERATIONS • Key ratios and operating statistics • Key performance indicators • Employment incentives • Use of reports – budgets, variances, etc. • Analyst reports – credit agency ratings, competitor reports

  12. INTERNAL CONTROL • Document an understanding of all five elements: • CONTROL ENVIRONMENT • RISK ASSESSMENT • INFORMATION & COMMUNICATION • CONTROL ACTIVITIES • MONITORING OF CONTROLS

  13. SIGNIFICANT RISKS • DOCUMENT SIGNIFICANT RISKS • Risk of fraud • Accounting or economic developments • Complex transactions • Non-routine transactions • Related party transactions • Manual or management intervention • Subjective measurements (estimates) • Litigation

  14. MEETINGS TO DOCUMENT • Team Discussions • “Brainstorming” re: fraud Revenue Recognition Fraud Management’s Override of Controls

  15. RMM-Risk of Material Misstatement • Due to error or fraud • Financial statement level • Relevant assertion level

  16. TEAM DISCUSSIONS • Can be only one discussion if both topics are considered! FRAUD? ERROR? MATERIAL MISSTATEMENT?

  17. ACTIONS TO DOCUMENT • MATERIALITY AND ANY CHANGES MADE

  18. ACTIONS TO DOCUMENT • AGREEMENT OF FS TO UNDERLYING ACCOUNTING RECORDS =

  19. ACTIONS TO DOCUMENT • EXAMINE MATERIAL AND CLOSING JOURNAL ENTRIES

  20. ACTIONS TO DOCUMENT • Development of an audit strategy • Characteristics of the engagement • Reporting objectives • Focus of team efforts • Less detailed than an audit plan • For small entities, need not be complex

  21. ACTIONS TO DOCUMENT • RISK ASSESSMENT • Evaluate the risk of material misstatement due to error or fraud • at the financial statement level • at the relevant assertion level MUST LINK AUDIT PROCEDURES TO RISK ASSESSMENT

  22. ACTIONS TO DOCUMENT • SUBSTANTIVE TESTING • For all relevant assertions • For all significant risks • RESOLVE CONTRADICTIONS • Evidence which conflicts • Disagreements among staff

  23. ACTIONS TO DOCUMENT • Must evaluate known and likely misstatements • Must distinguish between known and likely • Must request management correct • Must consider the effects individually and in the aggregate of uncorrected known and likely misstatements

  24. COMMUNICATIONS WHICH MUST BE DOCUMENTED • Engagement Letter • Significant Deficiencies and Material Weaknesses • Known & Likely Misstatements • Corrected • Uncorrected

  25. COMMUNICATIONS WHICH MUST BE DOCUMENTED THOSE CHARGED WITH GOVERNANCE • auditor’s responsibilities • overview of the scope and timing of the audit • to obtain information relevant to the audit • provide timely observations relevant to oversight • auditor determines the appropriate person

  26. COMMUNICATIONS WHICH MUST BE DOCUMENTED THOSE CHARGED WITH GOVERNANCE • auditor’s view of the qualitative aspects of the • entity’s accounting practices • difficulties encountered during the audit • uncorrected misstatements • material corrected misstatements • representations requested from management • management’s consultation with other auditors • significant issues encountered

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