Question

you have been approach by a potential new client to perform an audit of their comparative 2014 and 2015 year end financial statements. the company is based in Houston, Texas and it is in the crude oil discovery and delivery business. they currently have multiple oil pumping rigs and platforms across the country and in the Gulf. the company sales exceeded a billion dollars in the current year. collectively they have over a hundred billion in various types of fixed assets on their books, as well as a number of patents on the book relating to oil drilling process they have perfected. in addition to the typical industry style assets and liabilities, on their balance sheet, the company has recorded a significant contingent liability regarding EPA investigation into the prior period oil leak. the company also has disclose a significant oil reserves on their books. you has been elevated to a partner status in the firm. if the client is engage, you will be the managing partner on the job.

A- Describe the objectives and the actions that you will consider in determining if the firm should accept the engagement?

B- If engagement is accepted, identified what you believe are the greatest risks and how you might mitigate them?

C- list 5 audit procedures that you plan on applying in order to obtain evidence in any area and the appropriate assertion they relate too?

Answer 1

A) Factors that needs to be checked before accepting the engagement-:

1. First of all we should do the background check of the client, their promoters and related parties. If they are being investigated in some sort of fraud/malpractices  then we should not engage with the client. To do this check we need to see recent media reports, regulator websites, previous year annual reports etc.

2. Another area is Independence, we need to assess whether we independent in this engagement or not.  None of the member of firm should hold any type of interest in this entity.

3. Whether this engagement will be commercially viable or not. We need to check our recovery rates on this assignment.

Only after successful completion of above formalities we can engage with the client.

B) If we accept the above engagement, below will be the main risk along with our audit procedures-:

1) Revenue-: Revenue is a deemed fraud risk area for any entity. Hence this needs to be categorized as reasonable possible risk area. We need to check invoices, do customer existence check, receipt testing etc among other audit procedures to get comfort on revenue nos.

2) Capital Assets-: The entity deals in mainly capital assets spread across different geographies. Hence capital asset area will be another risk area. Audit procedures includes depreciation re-computation, physical verification of fixed assets, invoice testing etc.

3) Contingent liability-: Since EPA investigations are going on so contingent liability will be another significant risk. We need to roll out attorney confirmation and assess the impact.

C) Five audit procedures-:

1) Fixed Assets (Existence assertion)-: Audit procedures includes physical verification of fixed assets.

2) Revenue (Completeness assertion) -: Obtain sales register and confirm the population from financials.

3) Revenue (Existence assertion)-: Invoice testing along with customer balance verification to cover this area.

4) Fixed Assets (Rights and obligations)-: Audit procedure includes check ownership deed and title deeds.

5) Contingent liability-: (Accuracy/presentation and disclosure)-: Obtain independent confirmation from attorney to confirm the disclosures.