ScholarMatic: Explanation & Answer
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Audit Risk Analysis Project Instructions
The Audit Risk Analysis Project requires the student to assume the role of an audit manager of a public accounting firm. The firm has been asked by an audit partner to assess the acceptability of a company as an audit client.
The project pertains to the following: Pre-PCAOB, there was no required structure to the deliberations that an auditor went through before deciding whether or not to accept a new audit client. Now, the PCAOB requires that an auditing firm have a meaningful discussion among the persons in the auditing firm with decision-making authority before a new audit client is accepted. This is also required before an existing audit client is accepted for another year. The discussion must be documented.
The purpose is to help ensure that an auditing firm does not accept a client for which they do not have the manpower (woman power) or expertise to adequately service. Also, to help ensure that an auditing firm does not find out “too late” that the industry in which the new client operates is a high-risk industry—high-risk is fine only if you are prepared for it.
There are many journal articles out there about the topic of client approval. In the textbooks, look for the chapter on The Auditing Firms Required System of Quality Control or even specifically on approval/acceptance of new or continuing audit clients.
Important note:You may not select Wal-Mart, Target, Lowe’s, Home Depot, Ford, or General Motors as the subjects of the Audit Risk Analysis.
This project is to be written in a memo format, summarizing this assessment, and should be 5-7pages, not including the title or references page. If you choose to include charts &/or ratios, this will count towards the overall page requirement. A minimum of 5 references are required. Only the references page needs to be in current APA-format. The project is to be submitted by 11:59 p.m. (ET) on Sunday of Module/Week 7.
Include in the memo the following steps:
1. A brief description of the company, including the history of the company. The Subject Organization can be any company, public or private, including not-for-profit organizations.
2. A clear statement that the potential client should, or should not be accepted. State your conclusions in the first paragraph of the report. Say something such as: “For the reasons given below, I recommend that we accept (or do not accept) ABC Co. as an audit client.”
3. Give a brief introductory statement describing the company, its history, and its industry. One or 2-paragraphs should be enough. This introductory statement should be 1-page at the most.
4. The Independent Status of the Board of Directors
a. List the first 5 members of the Board of Directors by name. For these 5 members, list their full-time employer. Look at all the members of the Board of Directors and count how many do not work for the target company. State your findings, such as “Twenty-one of the twenty-five members of the Board of Directors would be considered to be Independent Members by the SEC rules.”
5. State whether or not all the members of the Audit Committee are Independent. Give the name of the Chairperson of the Audit Committee.
6. If the client is a public client, the date and purpose of the latest Financial Statement 8-K filing should be given.Specify by date filed the most recent Form 8-K filled by the company. State the subject of the 8-K. (This requirement does not apply if your target company is not a public company)
7. Do not include the financial statements—just the ratios that you think are relevant. Include ratios of a competitor, or of the industry.
ScholarMatic: Explanation & Answer
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