ACC 640 1-2 Memo

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1-2 Memo Sharon Lipham Southern New Hampshire University ACC 640 Auditing Prof. Patrenia McAbee May 19, 2024

To: Sally Stone, Director From: Sharon Lipham, Audit Manager Date: May 19, 2024 Subject: Sizing Up Prospective Clients Auditors collect information on potential clients from a variety of sources to assess their suitability for auditing. Reviewing financials and prior years’ audited statements provides insight into the client’s financial health, accounting practices, and auditability. The audit approach can be tailored by understanding the client’s industry standards, risks, and regulations. Industry associations often publish reports and resources on best practices and usual challenges within the sector. It is also important to verify basic company information and ownership structures. Check for any outstanding lawsuits or legal issues that could change the audit. If the auditing firm has experience with similar clients, their internal resources can be valuable. An auditor's understanding of the specific industry and relevant regulations is crucial. Preliminary discussions with client management can reveal their expectations and commitment to the audit process. Checking references from past clients can provide insights into the client's work style and past audit experiences. By using this combination of information, auditors can make informed decisions about taking on new clients and ensure a successful audit engagement (Deppe, n.d.). Auditors should be knowledgeable about the prospective client in several key areas to decide whether to perform an audit. Analyzing financial statements helps assess the risk of potential misrepresentation and the complexity of the audit. Understanding the client's accounting policies and internal controls helps gauge the audit effort needed. Knowing the industry's best practices

and specific regulations helps show areas of potential risk for the client. Understanding common industry challenges allows the auditor to tailor the audit approach for relevant risk areas. Being aware of any outstanding lawsuits or legal problems can change the audit scope and timeline. Understanding the client's expectations for the audit scope and timeline helps ensure a smooth engagement. By gathering information on these aspects, the auditor can make an informed decision on whether they have the competence and independence to conduct a successful and ethical audit for the prospective client (Deppe, n.d.). Auditors use a multi-pronged approach to gain a comprehensive understanding of a client's internal company environment. Open-ended discussions with key personnel like CEOs, CFOs, and internal control officers provide insights into the company culture, risk assessment process, and control environment. Auditors may interview personnel from various departments (sales, inventory, etc.) to understand specific control procedures and potential control weaknesses. Reviewing documented policies and procedures for handling cash, inventory, payroll, and other critical areas can reveal the design of internal controls. Understanding the company's structure, reporting lines, and segregation of duties helps assess control effectiveness. Analyzing trends in financial data can reveal unusual fluctuations or inconsistencies that might show control breakdowns. Finding abnormal ratios can point towards potential control weaknesses. Some companies use continuous audit software to check controls and transactions in real-time, providing valuable insights for auditors. By combining these techniques, auditors can build a strong understanding of the client's internal environment, assess the effectiveness of internal controls, and tailor their audit approach accordingly (RiskOptics, n.d.).

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