Wednesday, July 1, 2015

Audit response to significant risk identifed for audit engagement

In any audit engagement - it is mandatory to identify significant risk that is unique to individual engagement as required by international standard of auditing. The significant risk identified requires auditors' special consideration in designing and executing the audit procedures.

For instance, for active company, the auditor may concern that the revenue might not be recorded in appropriate period as there might be incentive for management to overstate the revenue. Given that the oil price is at low end cycle, there might be risk that the oil & gas audit client may understate their provision for any onerous contract.

In short, it is important to develop a robust understanding of the audit client (including: business environment, compensation package of management, etc) to identify significant risk.

When a matter is identified as significant risk - auditors need to design audit response that requires special consideration - i.e. carry more audit procedures for certain accounts to response to the fraud risk. For instance, carry out detailed analytical review for revenue account to identify any unusual transactions.

If impairment of property, plant and equipment is identified as significant risk (most likely there's indication of impairment), auditor need to examine the cash flow analysis of the Company carefully to evaluate the reasonableness of the cash flow analysis prepared by management to support the carrying amount of property, plant and equipment.

Significant - then do something different.

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