AUD 1.07 ENGAGEMENT LETTER (FACSIMILE)

Question 1

1.07 Engagement Letter (FACSIMILE):

Which of the following matters generally is included in an auditor’s engagement letter?

A) Management’s vicarious liability for noncompliance (illegal acts) committed by its employees.

B) The factors to be considered in setting preliminary judgments about materiality.

C) Management’s responsibility for the entity’s compliance with laws and regulations.

D) The auditor’s responsibility to search for significant internal control deficiencies.

Answer 1

C) Management’s responsibility for the entity’s compliance with laws and regulations.

An understanding established between the auditor and the client will include a section with the auditor’s responsibility to perform the engagement in accordance with GAAS and…

Management’s responsibilities for the preparation and fair presentation of the financial statements; for designing, implementing, and maintaining internal controls over financial reporting; for the prevention and detection of fraud; and for the entity’s compliance with applicable laws and regulations.

Factors affecting materiality are a matter of the auditor’s professional judgment and are not addressed in the engagement letter.

Management is not liable for the noncompliance (illegal acts) committed by employees and the auditor is required to obtain an understanding of internal control but not to search for significant deficiencies.

Question 2

1.07 Engagement Letter:

ENGAGEMENT LETTER ELEMENTS:

FACSIMILE

Answer 2

F - Fees
A - Auditor Responsibilities - GAAS/reasonable assurance
C - Confirmation of engagement
S - Scope & objectives of engagement
I - Internal control - comm sign deficiencies + mat. weakness in I/C
M - Management responsibilities - DIM
I - Irregularities - fraud
L - Legal - non compliance
E - Errors

Question 3

1.07 - Engagement Letter:

An auditor’s engagement letter most likely would include a statement that

A) Explains the analytical procedures that the auditor expects to apply.

B) Limits the auditor’s responsibility to detect errors and fraud.

C) Lists potential significant deficiencies and material weaknesses discovered during the prior-years audit.

D) Describes the auditor’s responsibilities to evaluate going-concern issues.

Answer 3

B) Limits the auditor’s responsibility to detect errors and fraud.

The understanding between the auditor and client would indicate that the prevention and detection of errors and fraud are the responsibilities of management and that the auditor’s responsibility is limited.

Internal control issues identified in the prior year would have been communicated in the prior year and would not be addressed in the understanding.

The auditor would not explain the analytical procedures, or any other audit procedures to be performed as that might compromise the effectiveness of the procedures.

It is the client’s responsibility, not the auditor’s, to evaluate going concern issues, although the auditor will respond if there is reason to doubt the entity’s ability to continue as a going concern for a reasonable period.

Question 4

1.07 - Engagement Letter:

The understanding with the client regarding a financial statement audit generally includes which of the following matters?

A) The responsibilities of the auditor

B) The preliminary judgment about materiality

C) The expected opinion to be issued

D) The contingency fee structure

Answer 4

An understanding with the client, documented in the form of an engagement letter, identifies the financial statements to be audited and specifies the responsibilities of the client and the responsibilities of the auditor.

The understanding would not specify the type of opinion expected to be issued.

Although fees are often discussed in the engagement letter, and there is often an indication that the fees may change if circumstances are other than expected, but there would be no provision for contingency fees.

The auditor would not normally share the preliminary judgment about materiality. Among other things, this information may make it easier for the client to fraudulently misstate their financial statements knowing the threshold below which the auditor is less likely to pay attention.