What is the purpose of an audit?
– To provide an objective independent examination of the financial
statements. Audits are meant to increase the value and credibility of the financial
statements, thus increasing user confidence and reducing investor risk.
What should you consider when accepting a new client?
– There are a lot of different components to consider before accepting a
client. These include:
oObtaining and reviewing financial information of the client. You
should look over there financial statements and ensure that this is
a company that would be a good client to audit.
oAsk third parties that may have done business with the client
about the companies integrity.
oEnsure that the firm is independent.
oMake sure that the firm has the necessary technical skills and
knowledge of the company and the industry that the company
operates in.
oMake sure that accepting this client does not violate any regulatory
agency requirements or the Code of Professional Conduct.
How do confidence level, tolerable error, and expected error affect sample size?
– Confidence Level- the confidence level and the sample size has a direct
relationship. The higher the confidence level the higher the sample size
needs to be.
– Tolerable error- the tolerable error and the sample size has an inverse
relationship. The higher the tolerable error the lower the sample size.
– Expected error- the expected error and the sample size has a direct
relationship. The higher the expected error the higher the sample size
needs to be.
Explain all the components of audit risk? (3 components).
– The three components of audit risk are Inherent Risk, Control Risk, and
