Chapter 1: Client Acceptance/Continuation Process
Information risk is the risk that the information provided by a company will be materially false. As auditor’s we plan and perform tests on a companies records to determine if they are accurate. We interpret FASB, AICPA, PCAOB, and other authoritative pronouncements to ensure that financial statements are fairly presented. We make judgments about the fairness of complex accounting processes such as inventory valuation and market valuation of securities. Always remember to test a companies system of internal control over financial reporting. And remember to do all of this effectively, efficiently, in a totally unbiased, and professional skeptical manner. Understanding the client-planning
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If these single source suppliers fail to satisfy requirements on a timely basis at competitive prices, the company could suffer manufacturing delays, a possible loss of revenues, or incur higher cost of sales, any of which could adversely affect the operating results.
Chapter 3: Preliminary Engagement Activities
Audits of the financial statements will include examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used & significant estimates made by management, and evaluating the overall financial statement presentation. Tesla’s investment policy provides guidelines and limits regarding credit quality, investment concentration, investment type, and maturity that they believe will provide liquidity while reducing risk of loss of capital. It is very important to understand the client’s business. The standards require it; the 2nd standard of Fieldwork also requires it. It is necessary in order to plan and perform our work. The auditor is expected to plan and perform an audit that provides reasonable assurance that material misstatements will be detected. Audit documentation should be prepared in sufficient detail to provide a clear understanding of its purpose, source, and the conclusions reached. Two of the most important things though are to validate compliance with PCAOB standards and demonstrate support basis for conclusions on every relevant assertions. Auditors maintain
Knowledge about risks related to the company evaluated as part of the auditor 's client acceptance and retention evaluation; and the relative complexity of the company 's operations. ( Auditing Standard No. 9 //. (n.d.).
PCAOB describes professional skepticism as a general duty of care that needs to be applied by the auditor throughout the duration of the audit engagement. Professional skepticism involves the auditor having a clear and questioning mind regarding the assertions that are presented by management or other client personnel. The auditor is instructed to not take the words or data presented by management as sufficient and appropriate audit evidence but rather the auditor needs to thoroughly audit the evidence with a questioning mind to achieve reasonable assurance about the persuasiveness of the evidence. Skepticism is composed of three elements; auditor attributes, mindset and actions. The PCAOB
The auditor must remember that all information collected during the audit needs to be sufficient enough to further the audit process. The information must not only possess the two qualities, relevance and reliability, but it should also test various assertions. For instance, in the audit of Walmart, the auditor should make an attempt to acquire information such as financial statements from the company’s bank, as opposed to acquiring the statements from Walmart’s management. Taking such crucial information from Walmart’s management will put the reliability of that information into question. It is possible that management may manipulate the financial statements, so that they are more appealing to the public and investors. Management may do things
Preliminary analysis to understand the client‘s business and risk - Understanding the auditee’s business, environment, and risks
CAS 300 requires auditors to their audit using a risk based model where the nature, timing and extent of audit procedures are based on the assessed risk of material misstatement. Pickett (2006) argues that for audits to be effective and efficient, much of the audit effort should be focused on areas that are considered to pose the highest audit risk. Additional audit procedures should be linked to individual audit assertions whereas other audit procedures need to be performed as and when needed. Thus, for an audit plan to be put in place, it is necessary for an auditor to come up with a risk profile of the client comprising an understanding of the business operating by the audit client, assess business risk and also perform its preliminary analytical review.
The auditor must obtain a sufficient understanding of the entity and its environment, including its internal control, to assess the risk of material misstatement of the FS whether due to error or fraud and to
However, regardless of its advantage, sole sourcing of supply is usually considered as risky decision since the company has to rely on the sole supplier. Therefore, it may result in a catastrophic event which is delay in shipment or stop production if the sole supplier has problems in terms of producing machines. Also, the supplier may become complacent or financial problems may occur if ACE increases the cost of production. Thus, maintaining the strong relationship between companies is crucial.
In addition if an auditor requires any interpretations of the documents the client must assist the auditor in attaining the needed understanding of the records.
The auditor’s responsibility is not to evaluate a client’s business model but to have a sufficient understanding of the entity. An auditor needs a sound and comprehensive understanding of the client’s business and industry to develop valid expectations about financial-statement assertions.
This frequently puts the auditor in the position, in effect, of deciding whether a company is able to obtain the funds it needs to continue operating. Thus, the auditor’s qualification tends to be a self-fulfilling prophecy. The auditor’s expression of uncertainty about the company’s ability to continue may contribute to making it a certainty.
Auditors having the appropriate competence and capabilities to perform the audit, and follow ethical requirements, and maintain professional skepticism throughout the audit.
If suppliers are limited, they have a greater opportunity to charge higher prices for raw materials, and they may also pose a threat of forward integration to the industry. Similarly, if an industry has few buyers, or buyers can cheaply and easily change suppliers, they can make demands for less expensive higher quality products, causing impact to profit (Porter, 2008, p. 83).
The literature reviewed for this assignment comes from information resources ranging from academic journals, internal reports, financial statements, and Tesla’s Form 10-K 2016. The information ranges in date from 2015 – 2017.
Since reliable financial information is essential for investors and other stakeholders to take adequate decisions, this reliability must be backed by independent review performed by independent and certified auditing firms, which are supposed to verify and certify financial statements issued by a company’s management. If the auditor is not competent and independent from management, the audit of the financial statements loses its credibility (Schelker, 2013, p.295). According to Impastato (2003), because of audit failures, accountants are to blame for investors losing billions of dollars in earnings in addition to market capitalization (as cited in Grubbs & Ethridge 2007).
A company prepares financial statement to provide information about its financial position and performance. This information is in turn used by a wide range of stakeholders (such as investors, banks, customers, suppliers etc) in making economic decisions with respect to respective economic interest in the company. Typically, in terms of ownership by investment in shares of the company, shareholders though own the company but do not manage it. Therefore, the shareholder and other such stakeholders to get comfort in taking sound decision need independent assurance from the auditors that the financial statements reflect true and fair view of the company affairs in all material respects. Hence, in order to enhance the level of