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Auditing process - Case Study Example

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AUDITING Table of Contents Table of Contents 2 Introduction 3 Client Business Risks 3 Auditor’s Business Risk 6 Audit Risks 7 1.Inherent Risk: 8 2.Control Risk: 9 References 11 Introduction Various important and critical relationships are created through audit process which involves many parties…
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Auditing process
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Auditing process

This type of risk is known as engagement risk. The probabilities of different loss or damages that can be caused due to this type of risk can be a financial loss, loss of reputation, and ultimately leading to the downfall of the audit farm. Engagement risks can further be subdivided into three types of risks, namely 1) Client’s business risks, 2) Auditor’s business risk and 3) Audit risk. In the cited case of Aerospace Lighting Inc. (ALI) there are several audit issues related to engagement risks. All those audit issues involved with ALI and its impact on the financial statements and the audit process have been discussed here. ALI is a Chicago based company which is involved in the business of providing cabin lighting system to its clients in aerospace industry. There has been a change in ALI’s business strategy and its external auditors. This study entails about the different business risks associated with ALI and the corresponding audit issues. Client Business Risks Business risk can be defined as the probability that a given company will make less profit than what has been anticipated or there is a possibility that the company will make a loss instead of profit. Several factors influence business risks, like cost of inputs, volume of sales, price per unit, government policies and so on and so forth. The validity of items in financial statements of a company can be evaluated by an auditor based on certain factors. They are: knowledge of business risks associated with the business activities followed by the client, structure of the organization, internal and external environment of the business concern and the interactions between them (Bell et al. 1). Business risk methodology of audit process includes some of the following key points: 1) Developing an understanding about the process of risk management in the organization. 2) Developing an understanding about the risks involved in the business of the organization. 3) The risks which are identified give an idea about its expected impact on the financial statements. 4) Assessment of the control system about how much efficiently it manages risk (Rittenberg 121-123). In ALI’s case, various factors which have an impact on client’s business risks can be subdivided into three headings, namely management, entity and industry. A review of the previous auditor’s report and views of the Chief Financial Officer (CFO) are available and can be used as good audit evidence. CAS 620 relates to the decision of an auditor to use the work of an auditor’s expert. CAS 500 provides the necessary requirements and guidance to auditors regarding audit evidence. Consultant advice is also a good option in this case which is explained in CAS 220 (Financial Reporting & Assurance Standards Canada 1-8). Hence, regarding client’s business risks, following evidences can be considered as being the business risks involved in ALI: 1) Management: Firstly, regarding management of ALI, its integrity is the key. Certain evidence that ALI is not loyal to its parent German company named BmG can be inferred from the case. ALI’s management is only concerned about the financial performance of the company. While achieving its financial target, ALI calls for a strategy involving rapid growth of the company. ALI is not concerned much about reporting BmG regarding the means adopted by them to achieve its target. Here lies the business risk in the part of ALI’s management. There is a high probability that ALI can restore to unfair ... Read More
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For any organization, the top level persons such as CEO or Directors set the tone for commercial performance and corporate governance for any company (Crowe Horwath, “Setting the Tone at the Top: Sustaining Ethical Behavior”). The case of Societe Generale provides a perfect example indicating the importance of auditing in an organization.
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