Text PAQ 3.37

Gaining an understanding of a new client

Required

What financial information could Clarke Partners use to understand its new client, Dolphin? Explain how it would be useful.

Notice again here how a key feature of this answer for you to note is the way that examples of the information from the scenario in the question is used in the explanations … this is another good illustration of how you move from being able “regurgitate” facts to being able to “apply” those facts in a given situation – that means only use/apply the facts/factors that are relevant!

Financial information that would normally be available includes prior period financial reports, anticipated results for the current year, and industry data for comparisons.

For prior period financial reports, the information could be used to calculate ratios and trends (i.e. analytical procedures). The auditor would gain an understanding of the client’s main categories of revenue and expenses, and the relative importance of various assets and liabilities.

For anticipated results, this could be analysed to understand the client’s expectations regarding growth (or decline) and also reveal shifts in revenue and expense patterns. The auditor would consider whether actual changes in business are reflected in the accounts (e.g. has the bank given the business a new loan to finance an expansion or new purchase of equipment?).

For industry comparison, the auditor can compare the audit client’ results to other firms within the same industry. The following are some questions which when answered will provide information about the new client:

1. How similar is the client to other businesses in this industry?
2. What are the major trends developing in the industry, particularly as economic conditions change?
3. this client show the same trends? Why/why not?

The auditor would also use the reports to understand the difference between peak and off-peak periods and how they affect the business’s profits. Specific issues include provision for annual and other leave (apparently some staff never take holidays) and the most senior staff’s retirement-related provisions.

The auditor should also obtain information about occupancy rates, visitor numbers, staff numbers, and compare these to the financial data. For example, does accommodation revenue vary proportionally with occupancy rates, tour revenue with visitor numbers, payroll expense with employee numbers? Why/why not?