ACCA Audit and Assurance (F8) Practice Exam

What is a characteristic of a "High Risk" client?

1. Strong financials

2. Prudent accounting

3. High turnover of staff

4. Competent directors

The correct answer is: High turnover of staff

A characteristic of a "High Risk" client is high turnover of staff. A high employee turnover rate can indicate instability within the organization, affecting its operational effectiveness and reliability. This aspect raises concerns for auditors, as frequent changes in personnel can lead to inconsistencies in accounting practices, a lack of continuity in internal controls, and potential knowledge gaps regarding company processes and records. Auditors may find it challenging to assess the integrity and competence of the accounting function if key personnel change frequently, increasing the overall risk associated with the audit engagement. In contrast, strong financials, prudent accounting, and competent directors typically suggest a lower risk profile. Strong financials indicate a stable and well-managed entity, prudent accounting reflects solid practices that align with accounting standards, and competent directors usually provide effective governance and oversight, all of which contribute to a more favorable risk assessment for an audit.