Identifying risks through understanding the entity 510 Page 1 of 10

Transcription

1 Page 1 of 10 Entity Period ended Objective: To identify the risks of material misstatement, whether due to fraud or error, at the financial statement and assertion levels, through understanding the entity, including internal control (CAS 315.3). Use this form to identify possible business and fraud risk factors. Note that many business risks can also be a fraud risk. Record possible risk factors identified on Forms 520/522 or equivalent for assessment and developing a possible audit response. Where possible, cross-reference answers to supporting documentation (such as business plans, budgets, agreements, etc.). GENERAL 1. Describe the nature of the entity s operations Type of entity (e.g., public, private etc.) If public, on what stock exchanges are shares/debt listed? Date incorporated: Jurisdiction(s) of incorporation: Industry is high risk, dangerous or controversial Activities tend to attract litigation Operations in regions that are economically unstable Attracts government/media scrutiny Major changes taking place in the industry PART A: INDUSTRY, REGULATORY AND OTHER EXTERNAL FACTORS 2. Important indicators, trends and constraints Identify economic indicators, industry trends and other constraints that could impact on the financial viability of the entity. Review relevant magazines, studies, reports, newspaper articles and information that is available on the Internet. Date Trend/constraint identified and possible significance (also indicate source of information where applicable) Major price increases/volatility in raw materials or other key supplies expected Interest rate increases will significantly affect cash flow needed for operations Demand for the entity s products/services are declining New technology or other factors are making existing products/services less valuable or obsolete Suitably trained staff difficult to find/employ Constraints on the availability of capital and credit Heavy competition from lower cost products/services New products/services or new lines of business require extensive expenditure on research and development

2 Page 2 of 10 Major impacts resulting from changing weather patterns (drought, flood, high temperatures, etc.) Changes in the supply chain Consolidation is taking place in the industry 3. Legal and regulatory requirements Identify laws and regulations (including environmental) that would result in significant liability if contravened. Also include the source of the authority such as the name of the act or regulation involved. Regulatory requirement Nature of liability involved and any history of violations Subject to complex regulations Fines or penalties could impact ability to operate History of litigation or violations 4. Significant customers, suppliers and competitors Name Describe significance (% of sales, etc.) Comments (i.e., length of relationship and any threat of loss) Loss of a significant customer or supplier Economic dependence PART B: NATURE OF THE ENTITY 5. Provide a brief outline of how the entity operates (one vs. multiple locations, local, national or international sales, marketing, Internet sales, competitive advantages, etc.)

3 Page 3 of Ownership Describe the nature of ownership (such as owner/manager, family members, public ownership or taxpayers). 7. Large stakeholders (individual/company) % Describe any direct involvement, influence or agreements that exist Significant stakeholders not active in day-to-day management of the entity Extensive public scrutiny of the financial statements Parent company uses a different financial reporting framework 8. Board of Directors (where applicable): Name Member since On Audit Committee? (Y/N) Comments (skills, background, expertise, etc.) Roles and responsibilities unclear (such as in a Board charter or code of conduct, etc.). No business plan (e.g., annual) Board accepts management recommendations without any substantive discussions/questions Minutes of meetings poorly documented and/or not approved Limited or no financial expertise on board or audit committee No regular monitoring/review of financial results to budget Board members get involved in day-to-day operations and undermine management authority 9. Management oversight and accountability To whom does management report on a regular basis (if anyone)? Nature of accountability (i.e., board, franchisors, bank loan agreements, etc.) Describe the reporting requirements

4 Page 4 of 10 Management is not being held accountable for actions Management is not inclined to share bad news or poor performance with the board or others 10. Key personnel Name key members of the management team or attach an organization chart. (Note: One person may perform multiple functions or more than one person may fulfill some roles.) In charge overall Finance Sales Human resources Information technology Administration Purchasing Operations Describe the entity s payroll (hourly, salary, etc.) policies and performance incentives (if any). Describe any significant terms of contract with unions or other employee groups. Changes in key personnel or departure of key executives Friends/family frequently hired who do not have the required skills Staff roles and responsibilities are unclear Inadequate support (i.e., staff resources) to perform the job Lack of personnel with appropriate accounting and financial reporting skills Wages are below market prices Minimal staff accountability for poor performance Incentive pay is large 11. Management operating style Describe management s primary operating style (i.e., autocratic or consensus building, risk taking or conservative, etc.) Operations dominated by a single person or small group of people Poor attitudes toward internal controls Overly aggressive risk taking Poor staff morale

5 Page 5 of Management pressures Identify any pressures on management that could provide a source of temptation to manipulate financial statements or misappropriate assets. Consider incentive bonuses, a planned sale of part or all the entity, need for new financing (acquisitions or new initiatives), reducing taxes, or meeting expectations (covenants) imposed by lenders, shareholders or other third parties. Describe the pressure Who is affected? What F/S areas are susceptible to misstatement? Bank covenants close to being breached Plans to sell entity Personal financial pressures of management Significant incentive bonuses Need for significant new financing History of financial statement manipulation or misappropriation of assets 13. Investigations, charges, and convictions Have any key members of management or the board been subject (e.g., in the last 5 years) to: A significant investigation by a regulatory body? (Y/N) Charges/convictions of a criminal act or fines for non-compliance with any regulations? (Y/N) If yes, describe below or cross-reference to supporting documentation. Impact on operations and liquidity of investigations, charges or convictions 14. Key advisors to entity List key advisors to the entity (i.e., legal, bankers, actuaries, insurance brokers, etc.): Contact person Company Phone/ Type of service provided 15. Related parties Does the entity have a process to ensure related party transactions (RPT) are identified and the terms (i.e., arm s length) disclosed? Yes/No If yes, describe below:

6 Page 6 of 10 List identified related parties: Name Relationship Nature, terms and/or extent of transactions Significant related party transactions not in the ordinary course of activities Undisclosed related parties or transactions Transactions used to cover up a key issue such as lack of working capital or misappropriation of assets Undisclosed guarantees and loan conditions 16. Financing Name of lender Financing available Description (interest rate, maturity date, security and covenants) Entity is highly leveraged Use of complex financing arrangements Drop-in value of property held as security Bank covenants have been (or are close to being) breached Working capital is insufficient for day-to-day needs Inability to raise new financing 17. Subsidiaries and long term investments If many subsidiaries or long-term investments exist, obtain or prepare a chart of the overall entity structure: W/P ref. Name % owned Method of accounting used Complex alliances, joint ventures or corporate structure Foreign operations Major investments not subject to audit Fiscal year-ends not the same as entity

7 Page 7 of 10 PART C: ACCOUNTING POLICIES (selection and application) AND ESTIMATES 18. Significant accounting policies and estimates List significant accounting policies and estimates used or refer to description in notes to the financial statements: Description Is policy/estimate unusual, controversial or lacks authoritative support? If yes, explain. Describe any changes (in period) or expected changes (future periods) in accounting policies and their impact on the F/S. Inconsistent application of accounting policies Policies are often changed or modified Application of new accounting pronouncements Policies can be manipulated to meet a goal such as a revenue threshold or incentive bonus Significant estimates involve subjective judgments or uncertainties that are difficult to corroborate Events or transactions involve significant measurement uncertainty PART D: OBJECTIVES, STRATEGIES AND RELATED BUSINESS RISKS 19. Business planning Does the entity have a documented business plan that sets out objectives and strategy? (Y/N) Does entity identify and assess related risks? (Y/N) If yes, attach the plan and/or risk assessment. W/P ref. If no plans are available, briefly describe the entity s objectives/strategy below. Year Key objectives, strategies for achieving objectives and related risks to be managed Ref

8 Page 8 of 10 Entity is drifting with no plans or sense of direction Management is often surprised by unexpected events Plans are overly ambitious or poorly thought through Resources not allocated to priority areas 20. Significant Contracts Nature of contract and its term Financial statement implications Non-compliance with contract terms Contract terms are onerous and are undermining the financial viability of the entity 21. Entity position in the business life cycle Identify the stage in the business life cycle that best describes the current state of the entity. Then check the related risk factors (if any) that apply from the appropriate list below. Rapid growth (start-up or high growth) Control systems are not keeping up with the growth Inadequate cash flow to address the needs Difficulty attracting experienced staff Mature (Steady growth or static in marketplace) Need for new capital and/or ideas More bureaucratic than entrepreneurial Declining need for services provided Lack of innovation or new ideas Declining Significant declines in need for services provided High levels of bureaucracy is choking client service Unwillingness to change or embrace new ideas Significant management time spent on cost control PART E: MEASUREMENT AND REVIEW OF FINANCIAL PERFORMANCE 22. Performance measures Key measures used by management (financial and nonfinancial) to assess performance Method of calculation and frequency (weekly, monthly, etc.)

9 Page 9 of 10 Performance is not measured by the use of indicators No action is usually taken to correct poor performance 23. Analytical review Describe key changes and trends over prior periods (consider using Form 524 to record detailed results). PART F: INTERNAL CONTROL RELEVANT TO THE AUDIT It is a matter of the auditor s professional judgment whether a control, individually or in combination with others, is relevant to the audit. Refer to CAS 315.A57 for factors to consider. When obtaining an understanding of controls that are relevant to the audit, the auditor shall evaluate the design of those controls and determine whether they have been implemented by performing procedures in addition to inquiry of the entity s personnel. 24. Entity level and IT general controls Complete Forms 530 and 532 or equivalent to address the control environment, risk assessment, information systems, fraud, certain control activities and monitoring. 25. Significant risks identified Identify the controls relevant to each risk identified (cross-reference to risk register Forms 520/522 or other relevant work papers). If no controls exist this may indicate a material weakness to be reported. 26. Classes of transactions that are significant to the F/S Identify the significant transaction streams (record on Form 404). For each significant transaction stream: (Complete the applicable control design Forms ( ) and Form 534) a) Consider the risks of material misstatement that could occur. Completed/updated by: b) Identify relevant control activities (if any) that mitigate the risks identified. c) Evaluate the design of relevant controls and their implementation. d) Document procedures by which transactions are initiated, recorded, processed, corrected as necessary, transferred to the G/L and reported in the F/S. Complete Form 534 for each transaction stream or, if no relevant controls exist, prepare a memo. Material weaknesses in internal control exist Material fraud risks are not being controlled

10 Page 10 of 10 OTHER MATTERS Any additional comments or updates: Additional risk factors identified: Conclusion: Through the use of appropriate risk assessment and other audit procedures, we have: Obtained/updated an understanding of the entity and its environment including internal control; and Identified possible risks of material misstatement and recorded them on the appropriate risk register (forms 520/522) or equivalent for further assessment. Period Prepared/updated by Date Reviewed by Date