Management Accounting: Client Acceptance Decision, Audit Planning, Preliminary Risk Assessment, Inherent Risks, Control Risk

This report discusses the client acceptance decision, audit planning, preliminary risk assessment, inherent risks, and control risk in management accounting.

Running head: MANGEMENT ACCOUNTING
MANGEMENT ACCOUNTING
Name of the Student:
Name of the University:
Author Note

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Table of Contents
Introduction................................................................................................................................2
Discussion..................................................................................................................................2
Client acceptance decision.....................................................................................................2
Audit planning........................................................................................................................4
Preliminarily risk assessment.................................................................................................6
Preliminarily materiality calculation......................................................................................6
Inherent risks..........................................................................................................................7
Control risk.............................................................................................................................8
Conclusion................................................................................................................................10
References and bibliography....................................................................................................11

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Introduction
The report is prepared to review the company named “Sheridan AV” in the audit
point of view. Sheridan AV is a retail and wholesale company of the electronic products. The
company is situated in the Brigstowe. The company is involved in the retail as well as the
wholesale of the electronic items based on the audio and visuals. The some key products of
the company are speakers, projectors, television, screens, audio -visual receiver, blue ray
players and same like. John Sheridan founded the company in 1971. The mission of the
company is to bring the absolute best in sound and vision for their customers. The company
is not focused to sell the huge product range but to provide the selected high quality product,
which give the flawless experience to the customers of the company.
Discussion
Client acceptance decision
The client acceptance decision is the process to accept the audit request offered by the
any company to the audit firm. The client acceptance the minimum five major issues that
must be addressed. The five major are as follows:-
 Management Integrity: - the management integrity of the firm plays an important
role in the client acceptance decision of the audit firm. The management integrity
means that, whether the company is providing the meaningful disclosures and
representation of the data during the time of their operation and requirements (Hassan
2016). For example, the independent auditor, analyse the financial statements, which
are based on asserting the management operations from including an element in
financial report to reveals the information of that element. Here, the company provide
the proper information related to different financial terms as the neon- current asset,
payables, inventory and same like.

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 Relationships with other professional: - the relation of the firm with the other
professional institutes and the companies also plays the important role in the decision
making to accept the client or not. If the company is highly reputed and have the good
relationship status with the other professional then it increases the audit firm to make
the decision to accept the audit request of the firm.
 Risk association: - the level of risk associated with the firm also influenced the
decision making process of the audit firm to accept the decision of the firm (Habib
2015). Mostly, the high reputed companies with the lower risk attracts the audit firm
to accept the audit request. A prospective client involved in or about to be involved in
litigation can be very dangerous. This is particularly true if the work to be performed
by the cu may be involved in the litigation or in some other form of claim. Worse still
would be a lawsuit between the prospective client and another client of the CPA.
Here, the information revels by the Sheridan AV, shows there is not a high risk
associated with the firm as the company properly maintained and report its financial
information.
 Technical competence: - the technical competence also affect the decision making
process of the audit firm. Like the size of the company, their operation, industry type
and likes (Knechel and Salterio 2016). The Sheridan AV is not a big company but big
enough to attract the company. As the some audit firms are specialized in the certain
field and only take the work of the same industry. Many prospective clients may be
subject to complex laws and regulations of several governments in different countries.
Financial stability and liquidity of the prospective client also are important. Stability
and liquidity can affect the CPA's choice of auditing procedures and the report
ultimately rendered. A prospective client with liquidity problems, an inability to meet
its financial obligations when they are due, large numbers of transactions with related

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parties, and dependence upon a single customer or a small group of customers should
be carefully considered prior to acceptance.
 Professional fee: - the monetary factor also affect the decision making process of the
firm as the company. Generally, the high fee attract the auditor to accept the request
of the audit (Mock, Srivastava and Wright 2017). As the audit firm are also provide
audit services for the making profit the and the audit fee is there main source of
income. Adequate fees must be charged if a client acceptance decision is to attract and
retain competent personnel. Although profitability cannot be allowed to overshadow
integrity, profitability most assuredly must be considered if the CPA is to be
successful (Fortvingler 2016). The fee of the auditor must provide satisfaction to the
auditor in against the work done by the auditor.
Audit planning
The audit procedure is an activity used by the auditor to identify the quality of the
financial information by the clients. There are various procedure available to analyse and
examine the quality of the provided information (Kleinberg, Mullainathan and Raghavan
2016). The whole audit procedure is divided into the three parts that is planning, performing
and reporting.
In the audit planning is an important part of the audit as the all plan and procedure to
perform the audit and to identify the business risk is done in this part (Holmen, Haugen and
Ratvik 2017). The auditor try to identify the audit risk and solve them to the acceptable level.
This is the constant function of the auditor in the entire auditing process of the auditor. The
auditor analyse the various accounting aspect of the Sheridan AV to identify the risk
associated with the sale system, purchase system, inventory, purchase and other important
aspect of financial terms. The auditor plans the timing, nature as well as the extent of the

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supervision of the evolved team members and review work. The main importance or the
reason of the audit plan are as follows:-
 The audit planning is very important to identify the area of the risk of the material
misstatements (Yoon, Hoogduin and Zhang 2015). The material misstatement means
the disclosure of the unfair information that effect the evaluating process of the
auditor. Here, the auditor plan the entire audit procedure for the Sheridan AV in the
basis of previous identified risks.
 Secondly, it is important to develop the procedures to address the identified risks and
also to obtain the sufficient appropriate evidence of the identified material
misstatements.
 The planning of the audit also helps the auditor to estimate the cost of the effort made
by the auditor while performing the audit of any firm (Leitch, 2016). This make sure
that the audit cost must be the reasonable for the audit firm as well as the client
company. In this, audit estimates the cost of audit for the Sheridan AV.
 The audit planning also reduces the chances of the misunderstand between the audit
firm and the client company (Hines, et al. 2015). A proper planning helps the auditor
to be attentive whole time during the audit.
In context of new client matters, important issues involve with the company as mention
above. First, auditor considers any type of major issues with the with the company for which
the audit will perform. If the auditor found any issues, then it is a big problem for both the
client and the auditor as the auditor owes a duty of care to the clients (Bahr 2018). Secondly,
the auditor will consider the client’s overall financial status, as the client be able to continue
their operation in another year or not. Thirdly, as we all know that the auditing business is not
a charity work. It is also a business and hence auditors confirms that the client should pay the
reasonable audit fees to the audit firm. Finally, the audit firm contacts the former auditor of

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the company to ask the information about the specific issues that need attention related to the
client (Menon and Williams 2016). In the given case study, the auditor perform the several
testing to identify the business risk associated with the company. The main test that are used
in the provided case are valuation test, dual aspect test, classification test and occurrence test.
The auditor performs the valuation test, to determine the truthfulness of the
information provided by the firm. The valuation test tests the value of the different account
provided by the firm. The dual aspect test is the method of verification of any information. In
this, the auditor verifies the both the end of the transaction (Fan, Nagarajan and Smith 2015).
Classification test are used to ensure that the company is properly done the classification of
the different accounts while preparing the financial report or not. Lastly, the occurrence test
are those test that verifies the information of the company is actually occurred or not.
Preliminarily risk assessment
The preliminarily risk assessment is the process of identifying the risk associated with
the information provided by the client in the initial stage of the introduction. The preliminary
risk are those risks that are associated with the initial information provided by the company
or the identified the auditor in the earlier stage of the introduction (Mao, Ettredge and Stone
2019). This risk are generally identified at the time of the introduction phase when the auditor
try to understand or start knowing about the firm. Here, in this case, the initial risks identified
by the auditor at the time of knowing the firm is consider as the preliminary risk assessment.
Here, the report highlight various risk associated with the Sheridan AV. The maximum level
of the risk is associated with the non- current assets, Valuation of the inventory, purchasing
system of the firm, sale system of the firm, cash and revenue of the company (Khalil and
Mazboudi 2016). The auditor performs the various test in respect of the identified risk like
the classification test, dual aspect test and valuation test. These test also help the auditor to
provide and recommend the proper solution of the identified risk.

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Preliminarily materiality calculation
The preliminarily materiality calculation is the process of calculating the risk
associated with the initial information provided by the company to the auditor. The auditor
firstly, identifies the preliminarily risk and then start to collect the evidences of such risk.
After, collecting the evidence of the preliminarily risk, the auditor calculate the level of risk
associated with the information and the areas of such risk (Lai and Chen 2015). The
materiality calculation helps the auditor to meet the preliminarily risk and reduce the level of
such risk to the certain acceptable risk. This kind of the risk and the process of meeting it is
performed by the auditor in the planning and performing phase of the audit. In the given case
study the auditor perform the preliminarily materiality calculation by collecting the various
financial information of the company and documents of the Sheridan AV. The auditor collect
the financial report of the company, all purchase vouchers and sell vouchers, records of the
inventories and other details related to the cash transaction of the firm for the last year.
Inherent risks
The inherent risks are those risks of material misstatement in the financial statements
arising due to the error of omission or due to the factors other than the failure of control. In
simple words, the inherent risks are those risk which are associated with the financial
information of the company and generally rises due to the error of omission. The error of
omission occurs when the accountant of the firm fully omitted the transaction from the
accounting book. In the given case study the following are the main inherent risk are
identified by the auditor. Here, the main inherent risk identified by the auditor are non-
current asset, revenue and cash. The above stated three areas has the highest risk of material
misstatement as based on the control performance of the company (Knechel and Salterio
2016). To address this risks the auditor analyse the financial report of the company, all

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purchase vouchers and sell vouchers, records of the inventories and other details related to
the cash transaction of the firm for the last year.
Inherent risk description
(including accounts and
audit assertions affected)
Inherent risk assessment
(likelihood and
materiality)
Proposed substantive
procedures
Non- current assets The auditor examine the
classification method and
the valuation method use by
the firm in respect of the
non- current asset.
The proposed substantive
procedures for the non-
current assets are the
classification testing and
valuation testing.
Revenue The auditor examine the
purchase requisition,
purchase orders and the
invoices to analyse the
trueness of the information
proved by the company.
For this auditor follows the
valuation testing and the
occurrence testing.
Cash The auditor analyse the each
and every information and
documents like bills and also
confirm this with the
providers or the receivers to
make sure the genuineness
of the cash balance of the
firm.
For this the auditor perform
the occurrence test, dual
aspect test and the
classification test for the
surety of the value disclosed
by the firm as cash.

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Control risk
The control risks are those risks of a material misstatement in the financial statements
arising due to absence or failure in the operation of relevant controls of the entity. In simple
words, the control risks are material misstatement of the financial information generally
arises due the improper control function performed by the management of the firm. The
management must perform their control function to prevent this kind of risk and safe the
company and other stakeholder of the company from the malfunction and the frauds. Thee
auditor identified the purchasing system of the company, selling system of the company and
the method used by the company to value the inventories as the highest risk associated area
off the given company. To address this risk and to bring it into the acceptable level, the
auditor collect, analyse and examine the various accounting details and information of the
company. The auditor analyse the annual report of the firm for the last year (Knechel 2017).
The auditor also examine the different methods used by the management of the firm, the
policies and procedure of the management to perform the control function in the business
operations of the firm.
Control risks (including
accounts and audit
assertions affected)
Control risk assessment
(likelihood and
materiality)
Proposed internal controls
Sales System High For this the management of
the company need to hire
proper knowledgeable
accountant who has the
ability to perform the control
function for the company to
reduce the material

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misstatement.
Purchase system High The management of the firm
need to maintain the proper
purchasing system in the
operation of the firm. The
management also need to
review the performance of
the purchase system adopted
by the firm and make timely
changes in the system if
required.
Inventory valuation system High For this management need to
perform their control
function properly. The
management need to verify
the valuation of the
inventory in dual aspect
valuation procedure. Along
with the timely reviewing of
the results and
performances.
Conclusion
The paper concludes that the Sheridan AV is a retail and whole- sale company of the
electronics products. The client acceptance decision of the audit firm is affected by the

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management integrity of the company, professional relationship of the firm with the other,
technical ascertains, risk association and the professional fee. The audit plan for the provided
company is to examine the various high- risk associated information provided by the firm by
performing the various tests like occurrence test, dual aspect test, classification test and
valuation test. Further, the report concludes that the highest inherent risk associated areas of
the company are cash, revenue and non- current assets. While, the highest control risk
associated areas of the company are the purchasing system of the company, selling system of
the company and the method used by the company to value the inventories. The auditor use
various test to identify them and policy and procedures to minimise the associated risk to the
certain acceptable level.

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References and bibliography
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University and 2015 Mid-year Auditing Conference.
Fortvingler, J., 2016. Different approaches to fraud risk assessment and their implications on
audit planning. Periodica Polytechnica Social and Management Sciences, 24(2), pp.102-112.
Graham, I., Zhao, M., Conney, T., Klipstein-Groubusch, K. and Grobbee, D., 2016. 36
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in 11 Countries.
Habib, A., 2015. The New C hinese Accounting Standards and Audit Report
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Hale, A., Guldenmund, F. and Goossens, L., 2017. Auditing resilience in risk control and
safety management systems. In Resilience Engineering (pp. 289-314). CRC Press.
Hassan, Y.M., 2016. Determinants of audit report lag: evidence from Palestine. Journal of
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Hines, C.S., Masli, A., Mauldin, E.G. and Peters, G.F., 2015. Board risk committees and
audit pricing. Auditing: A Journal of Practice & Theory, 34(4), pp.59-84.
Holmen, I.M., Utne, I.B., Haugen, S. and Ratvik, I., 2017. The status of risk assessments in
Norwegian fish farming. Safety & Reliability, Theory and Applications.

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Khalil, S. and Mazboudi, M., 2016. Client acceptance and engagement pricing following
auditor resignations in family firms. Auditing: A Journal of Practice & Theory, 35(4),
pp.137-158.
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When Lead Auditors Accept Responsibility for Work Performed by Other
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Yoon, K., Hoogduin, L. and Zhang, L., 2015. Big Data as complementary audit
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