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anager is an important factor in the overall control environment, as the need for management authorisation can compensate for otherwise weak control procedures and reduce the risk of employee fraud and error, it can be a potential weakness since there is the opportunity for management override of controls. The owner-manager’s attitude to control issues in general and to the personal exercise of supervisory controls can have a significant influence on the auditor’s approach. The auditor’s assessment of the effect of such matters is conditioned by knowledge of that particular entity and the integrity of its owner-manager. Examples of matters that auditors take into account in this assessment include the following:
• Whether the owner-manager has a specific identifiable motive (for example, dependence of the owner-manager on the success of the entity) to distort the financial report, combined with the opportunity to do so.
• Whether the owner-manager makes no distinction between personal and business transactions.
• Whether the owner-manager’s life-style is materially inconsistent with the level of his or her remuneration (this includes other sources of income of which the auditor may be aware by completing the owner-manager’s tax return, for example).
• Frequent changes of professional advisers.
• Whether the start date for the audit has been repeatedly delayed or there are unexplained demands to complete the audit in an unreasonably short period of time.
• Unusual transactions around the year-end that have a material effect on profit.
• Unusual related party transactions.
• Payments of fees or commissions to agents and consultants that appear excessive.
• Loan accounts, on which no payments are made, or which do not earn interest, and for which the owner-manager is unable to provide any satisfactory explanation.
• Advances given to or taken from third parties for supply of goods and services against which no goods or services have been provided for an unreasonably long period.
• Disputes with tax authorities.
• Unusual delay in providing explanations or representations sought by the auditor for unusual transactions.
.35 Paragraph .20 of AUS 210 requires the auditor, when planning the audit, to discuss with other members of the audit team the susceptibility of the entity to material misstatements in the financial report resulting from fraud or error. Many small entity audits are carried out entirely by the audit engagement partner (who may be a sole practitioner). In such situations this requirement is not relevant, but the audit engagement partner, who will be planning the conduct of the audit personally, considers whether, and where, errors may be more likely to occur or how fraud might be perpetrated when assessing the risks of material misstatement and designing further audit procedures to respond to those risks.
.36 Paragraph .22 of AUS 210 requires the auditor, when planning the audit, to make inquiries of management inter alia to obtain:
(a) An understanding of management’s assessment of the risk that the financial report may be materially misstated as a result of fraud, and the accounting and internal control systems management has put in place to address such risk; and
(b) Knowledge of management’s understanding regarding the accounting and internal control systems in place to prevent or detect error.
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