Auditing: What You Need to Know

1.

The first step would be to perform comprehensive research on the client. There are a few elements that have to be ascertained and steps taken as per our reading. They include:

Finding and going through important financial documents such as 10-Ks and annual reports.

Assessing the criminal background of senior managers.

Consulting the client’s bankers, attorneys, and other auditors who have interacted and done business with him. Information to be collected here regards the management staff and the entity as a whole.

Determine how much dependent the firm is on the audit client.

Identify the risk the audit firm gains if it was to work with the client.

2.

Accepting a new client is difficult for an auditor as there is always risk involved with accepting the individual as a new audit client. The situation becomes more difficult if the client had an auditor before. The first step would be to ask the client to allow me to contact the previous auditor. If given a go-ahead, I would consult the auditor on matters regarding the management of the client’s firm and also ask why the auditor parted ways with the client. After this, the following steps will be taken:

Obtain financial documents and 10-Ks from the client and review them.

Assess the criminal background of senior managers.

Consult the banks, legal firms, and any other parties that are affiliated to the client’s business regarding information pertaining to the entity and the staff.

Identify any potential risks that come with working with the client.

Furthermore, I will try to get any publications containing pending litigations or file for bankruptcy.

3.

The audit engagement for companies that have obscure and complex organizational structure is usually more complicated as it takes up more time and requires more resources. Such structures are usually a red flag for audit firms. To begin with, getting crucial data needed for auditing from these kinds of firms is usually difficult as most of them are reluctant to provide audit firms with information. Aside from this, the process taken to get information is usually lengthy as there are a lot of steps involved. The best way to go about this is to ask for the data to be placed in a centralized location which will make it easy to navigate. Decentralizing the data will mean that an auditor will have to go to multiple places to obtain the necessary information needed for auditing.

4.

When determining whether or not to accept a new audit client, it is important to not only look at the company’s background but also its staff. The accounting team is what mainly connects the audit firm to the audit client. When an accounting team is being overworked and the employees posting a high turnover rate, it means that cross-referencing, which is an important step during audit trial, will be made difficult. Accounting errors will definitely result due to employee burn out. My first approach will be to find out why the employee turnover rate is high. The client may then need to work on making the firm’s human resource management strategies better before I consider taking him up as an audit client. Working with a consistent team of accountants makes work easier for the audit firm.

5.

The midsize audit firm will surely get a boost if the client goes public with an IPO. Considering that the company has been doing well for the last few years, it means that the general public has had its eye on the moves that the company makes. Investors are always looking for a place to invest in and putting their money in such a company would be great for them. Investing in an IPO comes with its own risks. For instance, there is a volatility risk where the price of shares may go up and down due to several factors such as the changing economic conditions. There is also an absolute risk where the share value decreases to nothing. To assess if the firm is in a position to go public with an IPO, I would look at its financial statements and determine whether it is in a position to bring itself back up in case absolute risk occurs.