Chapter 2: Process of assurance – obtaining an engagement

Question 1

1.1 Methods of obtaining an engagement

Answer 1

The two key methods are tender and advertising.

Question 2

2.1 Considerations prior to acceptance (factors to consider)

Answer 2

Before accepting we need to satisfy the following has been considered:
- Are we professional qualified to act
- Have we communicated with the existing or previous auditors
- Do we have adequate resources available
- Have we fulfilled the requirements to comply with the Money Laundering Regulations 2007
- Have we assessed the level of management integrity
- Have we assessed the level of risk

Question 3

2.2 Sources of information relating to new clients

Answer 3

During consideration the following information needs to be obtained
Client:
Financial statements
Internal audit reports
Management accounts

External:
Credit ratings
Bankers, solicitors
Laws and regulations
Internet search

Auditor:
Previous auditors

Question 4

2.3 Appointment decision chart

Answer 4

See chart

Question 5

2.4 Money laundering check

Answer 5

To comply with 2007 Money Laundering regulations, identification needs to be obtained before appointment, known as client due diligence. Client identification documents must be kept for a minimum of 5 years and until 5 years have elapsed since the relationship with the client has ceased.
Individuals
Photographic identification and other documents confirming name and address

Companies
Identification from companies house

Question 6

3.1 Procedures after accepting the engagement

Answer 6

• ensure outgoing auditors’ removal/ resignation has been properly conducted
• ensure new auditors’ appointment is valid
• prepare and submit a letter of engagement to the directors of the company

Question 7

3.2 Audit engagement letters

Answer 7

Engagement letters are issued after the auditors have accepted nomination. The purpose and practicalities are:
- define the extent of firm’s and management’s responsibilities
- minimise potential for misunderstanding between client and firm
- provides written confirmation of firms acceptance of appointment, scope, and the form of reports to be issued
- send to all clients
- send as soon as possible after appointment
The contents of an engagement letter must include objectives of auditor’s responsibilities, management’s responsibilities, scope of work, form of the reports, level of access to books and records and the reporting framework. It may include limitations of the engagements, expectation, confidentiality and restricted circulation of reports, arrangements (reliance on internal audit), restrictions on auditors liability and basis of fee calculations.