chap 8 understand the clients business and industry Flashcards
what is a related party transaction?
any transaction between the client and a related party
what do corporate minutes include?
key authorizations and summaries of important topics discussed
what factors hasve increased the importance of understanding the clients business and industry? (6)
- recent significant declines in economic conditions around the world. need to understand nature of clients business to understaned impact of major economic downturns on the clients FSs and ability to continue as a going concern 2. information technology connects clients with major customers and suplliers so auditor needs knowledge of the customers and suppliers and related risks as well as potential cyber risks 3. clients have expanded globally 4. info tech affects internal client process, improving quality and timeliness of accounting info 5. increased importance of human capital and intangible assets has increased accounting comlexity and importance of management judgements and estimates 6. many have invested in complex financial instruments which may have declined in value, require complex accounting treatments, and can involve unknown counterparties who may created financial risks for the client
.what is involved in a strategic understanding of measurement and performance?
A client’s performance measurement system includes key performance indicators (KPIs) that management uses to evaluate progress toward its objectives ex. market share sales per employee unit sales growth Web site visitors same-store sales sales/square foot
what does governance include?
the organizational structure as well as the activities of the board of directors and the audit committee
Business risks can arise that threaten management’s objectives. Knowledge of management’s objectives and strategies help the auditor to assess
client business risk and the risk of misstatements.
what does a strategic approach to understanding of the clients business and industry include (6)
- underatnd clients business and industry 2. industry and external environment 3. business operatins and processes 4. management and governance 5. objectives and strategies 6. measurement and performance
why do most auditors assess risk of material misstatment as high for related parties an drelated pary transactions? (3)
- because of the accounting disclosure requirements 2. the lack of independence between the parties involved in the transactions 3. the opportunities they may provide to engage in fraudulent financial reporting
because material related party transactions must be disclosed, all related parties need to be identified and included in the auditors _____ files early on
permanent
three primary reasons for obtaining a good understanding of the client’s industry and external environment:
- Risks associated with specific industries may affect the auditor’s assessment of client business risk.and acceptable audit risk 2. Many risks are common to all clients in certain industries- knowing those lets you determine their relevance to the client when assesing business risk and risk of material mistatement 3. Many industries have unique accounting requirements that the auditor must understand to evaluate whether the financial statements are in accordance with accounting standards.
Auditors should have an understanding of the code of conduct and investigate what?
any changes
because a transaction witha related party is not an arms length transation there is a risk that what?
they may not be valued at the same amount as a transaction with an independent third party
because of the lack of independence between related parties, the sarbanes oxley act prohibits related party transactions that involve what?
personal loans to any director or executive officier of a public company. banks and other financial institutions can make normal loans like mortgages to their directors and officers using market rates/
how does an effective board of directors help the company
they ensrue the company takes only appropriate risks
the auditor identifies and assesses risks of material misstatement, whether due to fraud or error, based on an understanding of the entity and its environmnent, including what?
the entitys internal control
what is a related party?
an affiliated company, a principal owner of the client company, or any other party with which the client deals, where one of the parties can influence the managemnent or operating polices of the other
what is involved in a strategic understanding of management and governance?
because managment establishes a comanys strategies and business processes, The auditor needs to assess management’s philosophy and operating style and its ability to identify and respond to risk since these influence the risk of material mistatements int he FSs
an affiliated company, a principal owner of the client company, or any other party with which the client deals, where one of the parties can influence the managemnent or operating polices of the other is called a?
related party
before the audit is complete, what does the auditor need to follow up on regarding the corporate minutes?
follow up on info to be sure that management has complied with actions taken by the stockholders and the board of directors
The auditor should read the minutes to identify ?
matters relevant to the audit
what is involved in a strategic understanding of business operations and processes? (3)
- business operations and Processes—The auditor should understand factors such as major sources of revenue, key customers and suppliers, sources of financing, and information about related parties that may increase client business risk. 2. Tour Client Facilities and Operations—Touring facilities is helpful in obtaining an understanding of the client’s operations 3. Identify Related Parties—Because related party transactions may not be at arm’s length, auditing standards require that related parties and related party transactions be disclosed in the financial statements if they are material.
what are examples of related party transactions?
sales or purchase transactions between a parent company and subsidiary, exchanges of equipment between 2 companies owned by the same person, loans to officier, exercise of significant managment influence on a client by its most important customer
Auditing standards require the auditor to perform risk assessment procedures to obtain an understanding of the client’s business and its environment in order to ?
assess risk of material misstatements.
how does the audit committee help the company with risk?
they oversee fiancial reporting which can reduce the liekliood of overly aggressive accounting
strategies are approaches followed by the entitiy to achieve organizational objectives.what is involved in a strategic understanding of client objectives and strategies or what 3 client objectives should auditors understand?
- Reliability of financial reporting 2. Effectiveness and efficiency of operations 3. Compliance with laws and regulations
If the client has set unreasonable objectives, especially when employees are incentivized to meet performance goals, there may be an incentive for ____ _____ , which increases the risk of financial statement misstatement
aggressive accounting
T/F Public companies must disclose whether they have adopted a code of ethics that applies to senior management as well as why they don’t if they don’t and any changes or waivers for any of these officers. who requires this
T SEC
what are minutes of meetings?
Corporate minutes are the official record of the meetings of the board of directors
as a part of understanding the clients objectives related to compliance with laws and regulations, the auditor should become familiar with the terms of what?
client contracts and other legal obligations
to gain an understanding of the clients goverance system, the auditor should understand what?
how the board and audit committee exercise oversight including consideration of the companys code of ethics and evaluation of the corporate minutes
