Audit Risk and Third Parties
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I need some help answering these questions on auditors and third party relationships:
1. When assessing audit risk, should auditors consider the type and number of third parties that may ultimately rely on the client's financial statements?
2. Should auditors insist that audit engagement letters identify the third parties to whom the client intends to distribute the audited financial statements?
3. Would this practice eliminate auditors' legal liability to nonprivity parties not mentioned in engagement letters?
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Solution Summary
This in-depth solution of over 1000 words discusses audit risk on the client's financial statements in terms of relationships to third parties, the audience for the client's audited financial statements and the boundaries of an auditor's legal liability. All these issues are explained in types of risk models and objectives of the third parties. All references used are included.
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Running Head: FINANCE
Audit Risk
Answer 1
Importance of Third Parties in Audit Risk Assessment
Audit risk is the risk that an auditor measures from the assessment of financial statements of an organization, if statements are materially misstated. The assessment of audit risk enables the auditors to conclude about financial reporting process of the company. An auditor assesses the risk through audit risk model that includes inherent risk, control risk, and detection risk (Knapp, 2008). Auditors should consider those third parties that have contractual relationship with company during the assessment of audit risk to effectively evaluate all types of risks like business risk, operational risk, and financial risk. The third parties include actual & potential stockholders, investor, employees, vendors, customers, and financial institution and all relay on financial statements of the company.
Auditors audit the financial statements that are useful for additional third parties like investors and creditors to evaluate financial performance of the company. In auditing, the auditors assess the audit risk to determine the procedure of audit risk. Auditor should consider investors, stockholders, and financial institutions, when assessing the audit risk by evaluating client's financial statements (Knapp, 2008). The investors, financial institutions, and stockholders depend upon financial statements of the company before making investment, financing to company, and increasing stake in the company respectively.
Auditors should consider all loan or financing agreement of client with financial ...
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