Ocean Manufacturing

Topics: Auditing, Audit, Internal control Pages: 7 (2123 words) Published: November 13, 2011
Case 1.1 – Client Acceptance

Question # 1: Identify 5 procedures an auditor should perform in determining whether to accept a client. Which of these five are required by the auditing standards? a. (AU 314) The auditor should obtain an understanding of the entity and its environment in the following areas: i. Client’s application of accounting policies

ii. The industry, regulation and other factors affecting the client iii. Client’s objectives , strategies, and related business risks iv. Methods used by the client to measure and review performance v. The client’s internal control

The second standard of fieldwork requires that the auditor obtain a sufficient understanding of the entity and its environment, including internal control, in order to assess the risk of material misstatements. The auditor should assess the inherent risk factors about the client by learning about the industry, regulations, etc as listed above. The auditor should also try to assess the control risk factors. Were transactions subject to management override? If they were, then internal controls are less effective. Thus, internal control is less reliable and internal control should be high. Further, it may take more work to reduce the audit risk to an acceptable level. b. (AU 315.09) The successor auditor should make specific and reasonable inquiries of the predecessor auditor regarding matters that will assist the successor auditor in determining whether to accept the engagement. vi. Management integrity.

vii. Disagreements with management and prior auditors. viii. Communications to audit committees.
ix. Reasons for the change of auditors.
Material errors and irregularities are more likely to exist when the management is dishonest. The auditors are required to document their communication to the prior auditors. c. Proper supervision and assess competence to perform the audit. x. The CPA firm must assess its ability to perform the audit. xi. It must assign proper staff and provide supervision. xii. It should identify if third-party professional help is needed. xiii. It should evaluate whether the engagement is a good fit for the CPA firm’s expertise. The first general standard requires that the audit be performed by a person or persons having adequate technical training and proficiency as an auditor. The second one states that the engagement shell be performed by a practitioner having adequate knowledge in the subject matter. d. Evaluate independence

xiv. Independence in mental attitude is required by the third general standard of GAAS. xv. Do audit (covered) members possess direct or indirect financial interest in the audit client? xvi. Do members, managers or partners have direct relative working in the management position for the audit client? e. Audit purpose.

xvii. State the character of the engagement as required by auditing standard of reporting. The auditor should consider whether the client has had its financial statements audited before, which would typically carry lower audit risk versus a client, which has never had its financial statements audited that carries a higher audit risk. Engagement letter would provide mutual understanding and divide responsibility of the auditors and the management. It states the purpose of audit, what needs to be audited and timing of the audit. The auditor preferably in writing should communicate clearly to the client about the objective of the engagement before accepting to do the work and have the client accept the terms set forward.

Question # 2: Calculate relevant preliminary analytical procedures to obtain a better understanding of the prospective client and to determine how Ocean is doing financially. Compare with industry ratio provided. Identify any major differences and briefly list any concerns that arise...
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Financial Audit and Laramie Wire Manufacturing Essay
  • The Ocean Essay
  • Essay on oceans
  • manufacturing Essay
  • Essay about Ocean Overfishing
  • Midwestern Ocean Essay
  • Ocean and Resources Essay

Become a StudyMode Member

Sign Up - It's Free