Audit and Assurance: Risk, Evidence and Reporting
What the case demands
The case usually presents a client with pressure points: tight covenants, a dominant owner-manager, related-party transactions, complex estimates, or a first-year engagement. You must be able to assess risk at the financial statement and assertion level, design responses, and select procedures that produce sufficient appropriate evidence. Know the components of audit risk (inherent, control, detection) and how they interact. Understand materiality determination, including performance materiality, and how it drives sampling. Revise the auditor's responsibilities regarding fraud, going concern, laws and regulations, and subsequent events. Know the reporting implications: modified opinions (qualified, adverse, disclaimer), emphasis of matter and other matter paragraphs, and key audit matters for listed entities.
Traps candidates fall into
- Generic risk lists. Marks come from linking a specific fact to a specific assertion and a specific procedure.
- Confusing management's and the auditor's responsibilities for going concern and for fraud prevention.
- Misusing emphasis of matter for a matter that requires a modification.
- Ignoring ethics clearance before accepting or continuing an engagement.
Worked example
A client's receivable from a related party equals 40% of total assets and is overdue. Risk: valuation and existence of receivables, and completeness of related-party disclosures. Responses: obtain the loan agreement and board minutes, confirm the balance and terms directly with the related party, review subsequent receipts, assess recoverability and the counterparty's ability to pay, and test disclosure of relationships, terms and outstanding balances. The rule of thumb: every risk sentence should name the assertion, and every procedure should name the evidence it produces.