4. Accepting Clients and Agreeing Engagement

Question 1

What are the preconditions for an audit?

Answer 1

1. Determining whether the financial reporting framework used for preparing financial statements is
   acceptable.
2. Confirmation from those charged with governance that they understand their responsibilities for:
   * preparing financial statements
   * internal controls over the preparation of financial statements
   * access to all records, information and persons relevant to the audit

Question 2

What communication needs to be done with the previous auditor in relation to a new client acceptance decision?

Answer 2

For new audit engagements, the auditor is also required to communicate with the previous auditor in
relation to a new client acceptance decision.

1. Obtain permission from the client.
2. Letter sent to outgoing auditor requesting facts which may impact whether to accept the
   engagement.

If no permission is granted to speak to previous auditor then Firms should consider refusing the engagement.

Question 3

What is an audit engagement letter? 

Answer 3

The engagement letter acts as the contract of the engagement.

A new engagement letter should be issued when there have been significant changes or
misunderstandings.

Question 4

What does an engagement letter contain?

Answer 4

1. The objective and scope of the audit of the financial statements;
2. The responsibilities of the auditor;
3. The responsibilities of those charged with governance;
4. Identification of the applicable financial reporting framework for the preparation of the financial
   statements; and
5. Reference to the expected form and content of any reports to be issued by the auditor, including a statement that there may be circumstances in which a report may differ from the expected form
   and content.

Question 5

What are the engagement letter requirements for recurring audit engagements? 

Answer 5

There is no requirement to issue a new engagement letter for each year of the audit, but many firms do this as good policy.

On recurring audits, the auditor needs to assess whether circumstances require the terms of the audit engagement to be revised and whether there is a need to remind the entity of the existing terms of the audit engagement.

Question 6

What does ISA (UK) 210 say about when it may be appropriate to issue a new audit engagement letter?

Answer 6

• There is any indication that the client has misunderstood the objective or scope of the audit.
• There are any revised or special terms of the audit engagement.
• There have been significant changes of senior management.
• There have been significant changes in ownership of the entity.
• There have been significant changes in legal or regulatory requirements.
• There has been a change in the financial reporting framework adopted in the preparation of the financial statements.
• There has been a significant change in the nature or size of the client’s business.
• There has been a change in other reporting requirements.