Question

D’Aquila, J., K. Capriotti, R. Boylan, and R. O’Keefe. 2010. Guidance on auditing high-risk clients. CPA Journal (October): 32-37

1. What are main factors that influence engagement risk?

2. Why should an auditor perform risk assessment procedures?

3. How does an auditor identify significant risks of material misstatement?

4. According to the article, what are the most important strategies firms should use to mitigate risk?

Eilifsen, A. and W. F. Messier, Jr. 2015. Materiality guidance of the major public accounting firms. Auditing: A Journal of Practice & Theory 34 (2): 3-26.

1. What are the three phases of materiality process?

2. What types of information is an auditor allowed to use to identify the overall materiality?

3. According to AS 11, how can an auditor establish materiality levels for particular accounts or disclosures?

4. According to AS 11, what should be the most appropriate tolerable misstatement?

5. Briefly describe the steps of evaluating audit results

6. According to relevant standards, how can auditors determine materiality for group audits?

7. Which benchmark(s) do the sample firms of Eilifsen and Messier’s (2015) study determine overall materiality?

8. What are the percentages employed by the sample firms to determine overall materiality?

9. How do the sample firms determine tolerable misstatement?

10. What amounts do the sample firms use to determine what is a clearly trivial misstatement?

Answer 1

The reference provided by you is not working, it would be better if you could share a link. I would try to answer as many questions as I can.

What are main factors that influence engagement risk?

It consists of three interrelated components: entity business risk, auditor business risk and audit risk.

Entity risk is risk concerned with the current on going operation of business. Whereas Audit risk is the risk that an auditor will provide an unqualified or clean opinion on financial statements that have been materially misstated or are otherwise inaccurate. There are some specific AS as well for these risks.

Statement of Accounting Standards Number 47 defines an auditor’s business risk as the risk that the auditor “may be exposed to injury or loss … from litigation, adverse publicity, or other events arising in connection with financial statements that he has examined and reported on.”

Why should an auditor perform risk assessment procedures?

This is perhaps the most important step where the auditor obtain an understanding of business process, people and environment to understand the risk. These procedures usually take place before your fiscal year has been completed and include various procedures, such as inquiries with management and other selected employees, analytical procedures, observations of controls in operation and inspection of documents to show controls have been implemented.

How does an auditor identify significant risks of material misstatement?

The auditor identifies significant risks of material misstatement by:-

Performing analytical procedures

Considering information from the client acceptance and retention evaluation, audit planning activities, past audits, and other engagements performed for the company

Inquiring of the audit committee, management, and others within the company about the risks of material misstatement

Obtaining an understanding of the company and its environment

What are the three phases of materiality process?

First phase: Establish materiality level

Second phase: Determine an amount less than overall materiality

Third phase: Evaluate audit results