Auditing and Financial Report

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?

Auditor independence and a prohibition on audit firms offering value-added (read "conflict of interest") services

Compare the primary auditor objectives in auditing historical financial statements to auditing internal controls over financial reporting. Identify at least two (2) objectives that are the most significant in reducing the risk of reporting errors or misstatements in financial statements. Provide a rationale for your response.

Describe what you believe is implied by the term “engagement risk.” What are the key factors likely considered by Deloitte and other audit firms when assessing engagement risk? How, if at all, are auditors’ professional responsibilities affected when a client proposes a higher than normal degree of engagement risk?

Describe what you believe is implied by the term “engagement risk.” What are the key factors likely considered by Deloitte and other audit firms when assessing engagement risk? How, if at all, are auditors’ professional responsibilities affected when a client proposes a higher than normal degree of engagement risk?

The requirements of the applicable financial reporting framework relevant to accounting estimates, including related disclosures

A review and an audit report are both a form of an attestation engagement. A Review, however, is less in scope so it provides a moderate level of assurance on the financial statements. It is considered a “sniff” of an audit, which comparatively provides reasonable assurance that no material misstatements occurred. Since a review deals with a limited scope, it does not provide the basis for expressing an opinion on the presentation of the

Analytical procedures are performed to assess whether there is any material modifications that need to be made to the financial statements. The accountant must obtain knowledge of the industry and entity in order to better understand the financials. The focus of the procedures and review should be in the areas where there are increased risks of material misstatements. The auditor should compare the financial statements to prior periods and inquire about any significant changes and/or discrepancies. Financial statements are reviewed to ensure they are prepared in accordance with GAAP, and that proper accounting principles and procedures are applied.

By taking the additional work the auditor would be violating several provisions of the Sarbanes-Oxley act. These provisions include: the “nonaudit services” and “hiring of auditor” provisions. The “nonaudit services” provision, states that “It’s unlawful for the auditors of public companies to also preform certain nonaudit services, such as consulting, for their clients (Sarbanes-Oxley Act, 2002).” Moreover, the “hiring of auditor” provision states that “Audit firms are hired by the audit committee of the

The act is an exhaustive piece of legislation that contains eleven major section and some of the most important titles outline requirements on auditor independence, analyst conflict of interests, corporate responsibility, enhanced financial disclosures, internal controls assessment, and corporate fraud accountability (Bainbridge, 2007). One of the main benefits of the legislation is to establish auditor independence requirements and rules for the prevention of conflicts of interest in particular by prohibiting auditing firms from offering other services. Prior to Sarbanes–Oxley, the auditing professionals were self-regulated and the decisions that controlled the industry, such as violation of ethical standards, were made largely by auditors themselves (Verschoor, 2012). In order to prevent conflict of interests, the Sarbanes–Oxley Act grants the PCAOB authority to oversee and regulate auditing firms, conduct investigations, and impose disciplinary sanctions against accounting firms (McDonough, 2004). Another provision of the Act is requiring senior executives to be personally accountable and responsible for the financial information reports by certifying that the information is correct.(Welch, 2006). A byproduct of the law implementation is a significant quality improvement on accounting practices;

The second type of engagement that provides no assurance is a compilation. According to AR-C 80, the objective of a compilation engagement is for the accountant “to apply accounting and financial expertise to assist management in the

• (Framework for Assurance Engagements para 21) Absolute Assurance • Absolute assurance can never be provided because of: – The nature of accounting: • Valuation issues, • Accounting policy choice and judgments, • Contingent items, – Time and cost of evidence collection and evaluation. Reasonable Assurance • Reasonable assurance is a high but not absolute level of assurance • The conclusion is expressed in a positive form – The financial statements are true and fair. • An audit engagement provides a reasonable level of assurance. • The opinion is expressed in an audit report.

3. What potential implications arise for the accounting firm if they issue an unqualified report without the going-concern explanatory paragraph?

Auditors don 't particularly favor to turn down current or prospective clients, especially when they own stock % in the company or if it is well-known company like Shell however being worried about their reputation and future works, they try not to audit dishonest clients, because it can have dire consequences for the auditor. In the case if auditor becomes involved with bad clients, it is necessary to weigh revenues earned from desirable clients against potential problems.

Assurance Engagement: Key elements of an assurance engagement: Levels of assurance Objective of an Audit: True & Fair Why is assurance important? Why can assurance never be absolute? Professional ethics: Basic principle governing of an audit: Threats and safeguards: Suggestion to improve or safeguard against threat: ICAB Code