Question 1

B) Explain any TWO (2) actions that may be used by an audit firm to minimize the risk of liability exposure.

I.Issuing and agreeing on the duties and responsibilities in an engagement letter.

Engagement letter about the interest of both client and auditor that help in avoiding misunderstandings concerning the engagement with respect to his engagement and documents and confirming the acceptance of appointment, the objectives and scope of audit, the extent of responsibilities and the form of reports to be made to the client.

As stated in ISA 210 the audit must first establish whether the preconditions for and audit are present and must confirm there is common understanding between the auditor and the client on the terms of the engagement.

The engagement letter shall include:

- Objective and scope of the audit

- Auditor's responsibilities

- Management responsibilities

- Identification of applicable financial reporting framework

- Expected form and content of any reports

II.Maintaining high-quality audit documentation.

In producing high-quality of audit documentation, the auditor shall include:

The discussion among the engagement team concerning the susceptibility of the entity's financial statement to material misstatement and the significant decisions reached.

- Key elements of the understanding obtained regarding each of the aspects of the entity and its environment and of each of the internal control components, the sources of information from which the understanding was obtain and the risk assessment procedures performed.

- The identified and assessed risks of material misstatement at the financial statement level and at the assertion level

- The risks identified and related controls about which the auditor has obtained an understanding on.

By evaluating the client's risk management process and understanding the outcomes of the risk identification and evaluation, auditors able to reduce their workload to a considerable level. The audit becomes more effective and efficiency because it is directly relevant to their client's day -to-day activities and increases the possibility of auditors in identifying significant errors or misstatements.