AUD 2.3 - Terms Of Engagement

Question 1

Responsible for the selection and appointment of the external auditor and for reviewing the nature and scope of the engagement:

Answer 1

The audit committee

Question 2

As part of the pre-acceptance phase of the engagement, the auditor should assess the following:

Answer 2

Firms ability to meet reporting deadlines
Firms ability to staff the engagement
Independence
Integrity of client management
Group audits

Question 3

If any of the following preconditions are not present, the auditor should not accept the engagement :

Answer 3

Applicable financial reporting framework
Management aware of responsibilities (obtain agreement)
Management-imposed scope limitation

Question 4

What should be included in an engagement letter?

Answer 4

Objective and scope of the auditor
Responsibilities of the auditor
Responsibilities of management
A statement that because of inherent limitations, an unavoidable risk exists that some material misstatements may not be detected
Applicable financial reporting framework
Expected form and content of any reports to be issued by the auditor and statement that circumstances may arise in which a report may differ from its expected form and content

Question 5

For public clients, the auditor must agree to the terms of the engagement letter with who?

Answer 5

The audit committee (should be provided to them annually)

Question 6

The following factors ma make it appropriate to revise the terms of the engagement for a recurring audit:

Answer 6

1. Any indication management misunderstands the objective or scope
2. Change in senior management
3. Change in ownership
4. Change in nature or size of entity’s business
5. Change in legal or regulatory requirements
6. Change in financial reporting framework
7. Change in other reporting requirements

Question 7

In an initial audit or re-audit engagement, it is mandatory that the auditor:

Answer 7

Make inquiries of the predecessor auditor (with the clients permission)
If client denies permission, the auditor should consider the implications and consider withdrawing

Question 8

Inquiries to the predecessor auditor should include:

Answer 8

Information that might bear on managements integrity
Disagreements with management about accounting principles, auditing procedures
Understanding as to the reasons for the change in auditors
Communication to management, the audit committee, and those charged with governance regarding fraud, noncompliance with laws, and internal control matters

Question 9

If the auditor decides a change in the engagement from audit to compilation or review is justified, the auditor should:

Answer 9

Should not refer o the original engagement or any procedures performed as part of the engagement or any scope limitations within the auditors report