Discuss the issue of an audit client’s business model and the concept of risk in an audit. In today’s environment (rather than the time the NextCard case actually occurred), how should the risk of the client’s business impact the audit plan and process?

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original topic: Discuss the issue of an audit client’s business model and the concept of risk in an audit. In today’s environment (rather than the time the NextCard case actually occurred), how should the risk of the client’s business impact the audit plan and process?

It is imperative as an auditor to gain an understanding of an audit client’s business model because there are industry-specific practices and areas of risks that should be emphasized. In the case of NextCard, this company was concentrated in establishing itself as one of the first issuers of credit cards online. Since their inception began during the Internet boom their business model was relatively new due to their client interactions occurring over the Internet. NextCard’s auditors, E&Y, should have emphasized the understanding of their business instead of accepting a client to enter an emerging industry. Given these circumstances, E&Y’s auditors in-charge assessed inherent risk too low and failed to uphold ethical requirements during their audit by showing a blatant disregard over the public interest in order to cover up NextCard’s fraudulent reporting. The auditors involved did not uphold their responsibilities as CPA’s an acted on based on self-interest.

In today’s environment, there is an added emphasis on understanding a client’s business, having competent staff that can perform a thorough audit, and proper risk assessment practices. The implementation of quality control within firms ensures that policies and procedures are designed, implemented, and maintained to ensure that firms comply with professional standards and appropriate legal and regulatory requirements. The process of client acceptance/continuance is supposed to provide reasonable assurance that firms are not associating with clients whose management lack integrity and can accept engagements where it is expected to be completed with professional competence by furnishing the audit team with knowledgeable and experienced individuals. Once a CPA firm has decided to take on a client the performance of risk assessment procedures will determine how the audit will be conducted. Through this auditors can identify and assess the risks of material misstatement which impacts audit planning and the nature, extent, and timing of audit procedures.

After performing risk assessment procedures that include an understanding of the entity and its environment and understanding internal controls over financial reporting the auditor will have a concise plan on how to carry out the audit. If these actions were to have been properly completed for NextCard, their risk assessment would have been assessed at a maximum due to their industry and practices implemented. Their allowances for bad debts were a clear area of significant risks and if their auditors would have acted with integrity and due care their fraudulent reporting would have been prevented.