CH3 : New Engagements, LOE and Quality control

Question 1

New Engagement

Answer 1

A new client proposal

Question 2

How are new engagements obtained ?

Answer 2

#Advertising
#Tendering
#Client requests

Question 3

What is tendering ?

Answer 3

A process in which the particular firm will submit a tender proposal along with other competing firms to the client. In this proposal, firms will include the services they provide, their features. The client will then evaluate multiple proposals and select and choose the one which suits their requirements the best and is highly commercially feasible to them.

Question 4

Don’ts of Advertising as an audit firm :

Answer 4

# Don't use unprofessional language.
# Don't perform any action or say anything which brings discredit to the profession and the professional body.
# Don't use nonfactual information and exaggerated claims in ads
# Don't breach any advertisement related law  and legislation of the jurisdiction in which the firm is based.
# Don't degrade other competitors in the industry and respect them

Question 5

Why clients may request particular firm to audit their F.S ?

Answer 5

• It may be due to a bank or legal requirement to fulfil.

- Market reccommendations.

Question 6

ISA 210 : Matters to consider before accepting the engagement / agreeing terms to engagement

Answer 6

These are 10 matters of which all must be considered and cleared before accepting engagement :

• professional clearance
• independence
• management integrity
• professional competence
• resources
• risk
• money laundering
• fees
• reputation of the client
• pre-conditions to audit

Question 7

Independence in ISA 210

Answer 7

• Auditors need to be aware of the ethical threats arising from the engagement and must implement safeguards to reduce those threats to an acceptable level.
• Auditors must ensure that their independence and objectivity should never be threatened when accepting an engagement.

Question 8

Money laundering in ISA 210 Pt 1

Answer 8

Auditors must perform client due diligence in order to comply with money laundering regulations.
* Auditors are not allowed to accept an engagement if actual or suspicions of money laundering in the organization exist.

Question 9

Money laundering in ISA 210 Pt 2 : What are the steps in client due diligence ?

Answer 9

# Establish the identity of the entity and the nature of its operations by obtaining a certificate of incorporation.
#If the client is an individual then obtain official documentation like a driving licence, passport and address.
# Estabilish a list of current principle shareholders and directors 
# Get company's registered address - headed letter paper.

Question 10

Management integrity in ISA 210 :

Answer 10

• If the auditor believes the client lacks integrity in their work then there is a high risk of fraud in that organisation and a high risk of intimidation threat faced. Thus, the risk of performing the audit will rise.
• Therefore, the audit firm must assess whether the risk is within the risk capacity of the firm or not before accepting the engagement.

Question 11

Resources in ISA 210 :

Answer 11

• Audit firm must ensure that sufficient staff and time are available to be assigned and allocated to the new engagement before accepting the audit.

Question 12

Risk in ISA 210 :

Answer 12

• The no. of risks faced by the auditor during the audit of the client.
• Client risks are that the client may have overseas transactions and branches as a result audit firm should have translators to translate the transactions and docs to the language desired by the firm.
• Thus, risks associated with the client can affect the opinion to be made by the auditor.

Question 13

Fees in ISA 210 :

Answer 13

Are the fees commercially viable for the client to pay the auditor.

Question 14

Professional competence in ISA 210 :

Answer 14

• Does the audit team have the necessary skills, capabilities knowledge and experience to perform the audit to a sufficient competent level.

Question 15

Reputation of the client

Answer 15

-Does our client face any adverse public media attention,if they do then this could also affect the brand image and reputation of the firm adversely.
Hence, the engagement should be rejected.

Question 16

Professional clearance in ISA 210 :

Answer 16

If offered an audit role then the audit must carry out the
following steps :
1. Seek permission from the client to contact outgoing/existing auditors to get info relevant for making the decision of whether or not to accept the engagement.
2. if permission is not granted then the engagement appears sus and should not be accepted bcoz it is a risky audit.
3. if permission is given then contact the outgoing auditor ad get the necessary info.
4. outgoing auditor will also have to seek first permission from the client before responding to our letter.

Question 17

Pre-conditions to audit : ISA 210

Answer 17

ISA requires auditors to do the following:-
# ensure that the financial reporting framework used to prepare the F.S is acceptable
# obtain a written agreement from the mgmt. which states that they acknowledge and understand its responsibility for the following :
- F.S are prepared in line with the financial reporting framework.
- Internal controls are free from material misstatements
- Auditors will be granted access to staff and information relevant to carrying out the audit.

Question 18

What if pre-conditions to audit don’t exist?

Answer 18

Then auditors must discuss with the client’s TCWG AND MGMT. about it and cannot accept engagement unless required by law.

Question 19

What is LOE ?

Answer 19

• An official legally binding contract between auditor and client

Question 20

What is the purpose of LOE ?

Answer 20

# to reduce the risk of any misunderstandings between the client and the auditor.
# to establish the terms and conditions of the contract
# to confirm acceptance of the engagement

Question 21

When is LOE revised & reissued?

Answer 21

it is revised and reissued in the following situations :

1. IF the client misunderstands the objective and scope of the adit then a detailed LOE must be reissued to clarify their misunderstanding.
2. If there is significant changes in the law and legislation then those new changes must be reflected in the LOE bcoz LOE is a contract and if the contract does not reflect changes then it is void.
3. If there is a recent change in senior mgmt. or significant change in ownership then must revise and reissue LOE as previous LOE was agreed with older mgmt. and new mgmt. could have different opinions abt it.
4. To include special or revised terms o the audit in the LOE
5. If there is significant change in the size and nature of the business / client then LOE must reflect those changes.

Question 22

On what basis are audit fees computed ?

Answer 22

It is fixed and based upon :
# Time committed to the audit
# Skills, experience and qualifications of the team members
# Risk involved

Question 23

Is LOE reissued annually ?

Answer 23

• In practice, yes it is

- in exam , it is reviewed annually for any changes and if there are changes then LOE is revised and reissued.

Question 24

What matters to include in the LOE ?

Answer 24

• The objective and scope of the audit
• The responsibilities of the auditors
• The responsibilities of the mgmt.
• The basis of computing the audit fees.
• Elaboration on the scope of the audit with reference to law
• The fact that some material misstatements may not be detected coz the audit is done on a sampling basis.
• Identification of the financial reporting framework to be used in preparing the F.S.
• Arrangements to be made for the planning and performing of the audit including composition of the audit team.

Question 25

Who holds primary responsibility for the overall quality of the audit?

Answer 25

Engagement partner

Question 26

How to perform a quality audit ?

Answer 26

By having an effective system of quality controls in place

Question 27

ISA 220 : Elements of Quality control

Answer 27

HEAL ME 
H - human resources
E- ethical consideration
A- acceptance and continuance
L - leadership

M-monitoring
E- engagement performance

Question 28

Human resources in ISA 220 :

Answer 28

• To ensure that audit team members have the required skills and capabilities to perform the audit as ISAs
• To ensure sufficient audit team members and partners are assigned to the audit.

Question 29

Ethical consideration in ISA 220 :

Answer 29

• To ensure that all members within the firm and team always comply with the code of ethics.

Question 30

Acceptance and continuance in ISA 220 :

Answer 30

to ensure acceptance and continuance procedures are carried out. Such as teams has evaluated mgmt.’s integrity, ensures appropriate audit team members are assigned to the audit and professional clearance has been obtained.

Question 31

Leadership in ISA 220 :

Answer 31

Engagement partner leads audit team by :
#Ensuring compliance with code of ethics
#Ensuring audit team members with necessary skills have been allocated.
#Ensuring sufficient and appropriate audit evidence is collected.
#Ensuring acceptance and continuance procedures have been performed
#Ensuring reviews have been carried out
#Ensuring difficult areas of the audit have been identified for appropriate consultations such as on impairment, revaluation and any area which the TM lack sufficient industry specific knowledge.

Question 32

Monitoring in ISA 220 :

Answer 32

• To ensure compliance with code of ethics, ISAs and local legislation during the audit. Also it is about implementing quality controls and monitoring if they work effectively.

Question 33

Types of reviews

Answer 33

# Cold reviews [post-issuance]
# Hot reviews [ pre-issuance ]

Question 34

What is a cold review ?

Answer 34

• A review is carried out after the audit report is signed.
• It is carried out to ensure that the quality control system is working effectively
• Issues and areas to improve are identified during the audit and then extra steps are taken to improve on those areas such as providing extra training to your employees, change your policies and procedures & take strict action against certain individuals.

Question 35

What is a hot review ?

Answer 35

• It is carried out prior to signing the audit report.
• It is carried out to ensure that the appropriate audit report is issued.
• It is carried out usually by the EQCR for listed clients, clients of unusual circumstances and of high risk.

Question 36

What happens in a hot review ?

Answer 36

- The EQCR will do the following :
# Have discussions with the engagement partner on significant matters.
# Review the F.S and the proposed audit report
# Review selected documentation and working papers that involve a high level of risk and judgement.

Question 37

Engagement performance in ISA 220 :

Answer 37

it consists of direction , supervision and review.

Question 38

Engagement performance : Direction

Answer 38

• Informing team members of their duties and responsibilities
• Informing team members about the objective of the work to be performed and the audit plan.
• Discussing and identifying areas of risk in the audit
• Inform team members about the nature of the business

Question 39

Engagement performance : Supervision

Answer 39

#Tracking progress of the work
#ensuring timetables are met to complete the audit work.
#Considering the competencies of the audit team members
# discussing significant matters

Question 40

Engagement performance : Review

Answer 40

#Reviewing the audit work to see whether it supports the auditor's understanding of the F.S
#Reviwing whether audit work was performed as per ISA
#Reviewing if audit evidence collected supports our audit opinion
#Ensuring appropriate consultation on important areas were undertaken.