2.1 - High and Low Risk Clients

Question 1

Prospects

Answer 1

Low risk - good long-term prospects
High risk - poor recent or forecast performance

Question 2

Finance

Answer 2

Low risk - well-financed
High risk - Likely lack of finance

Question 3

Controls

Answer 3

Low risk - strong internal controls
High risk - significant control weakness

Question 4

Policies

Answer 4

Low risk - conservative, prudent accounting policies
High risk - Evidence of questionable integrity, doubtful accounting policies

Question 5

Management

Answer 5

Low risk - Competent, honest management
High risk - Lack of finance director

Question 6

Transactions

Answer 6

Low risk - Few unusual transactions
High risk - Significant unexplained transactions or transactions with connected companies

Question 7

What are the first three factors auditors base a client’s riskiness on?

Answer 7

Prospects
Finances
Controls

Question 8

What are the other three factors auditors base a client’s riskiness on?

Answer 8

Policies
Management
Transactions

Question 9

Where the risk level of a company’s audit is determined as anything other than low, what should the firm do?

Answer 9

Specific risks should be identified and documented. May be necessary to assign specialists in response to these risks

Question 10

What should the expected fees from a client reflect?

Answer 10

The level of risk expected