Chapter 2 - Process of Assurance: Obtaining an Engagement

Question 1

How do accountants obtain an engagement?

Answer 1

1. Accountants are permitted to advertise for clients within certain professional guidelines, the details of which you do not need to know.
   Start point = auditor
2. Accountants are often invited to tender for particular engagements, which means that they offer a quote for services.
   Start point = potential client

Question 2

What are the 3 main steps in the process of obtaining an assurance engagement?

Answer 2

1. Obtaining an engagement
2. Accepting an engagement
3. Agreeing terms of an engagement

Question 3

What factors should be considered before accepting a new audit client?

Answer 3

Independence: Ensuring no conflicts of interest.
Ethical concerns: Assessing any ethical issues.
Resources: Confirming adequate time, staff, and expertise.
Client integrity: Reviewing the integrity of the client’s management.

Question 4

What are the acceptance procedures new auditors must carry out? (5)

Answer 4

CONSDERATIONS
1. Professionally Qualified to Act
2. Evaluate Existing Resources

ACTIONS
3. Obtain References
4. Communicate with Present Auditors
5. Assess Client Management Integrity

Question 5

ELP Considerations

Answer 5

Ethical
Legal
Practical

Question 6

What are the acceptance procedures new auditors must carry out, what are the considerations?

Answer 6

CONSDERATIONS
1. Professionally Qualified to Act
2. Evaluate Existing Resources

Question 7

What are the acceptance procedures new auditors must carry out, what are the actions?

Answer 7

ACTIONS
3. Obtain References
4. Communicate with Present Auditors
5. Assess Client Management Integrity

Question 8

Acceptance Procedure - Professionally Qualified to Act

Answer 8

• This step ensures the auditor has no legal or ethical restrictions (like conflicts of interest) that could impair independence.
• If conflicts or ethical issues are present, auditors may need to decline the engagement to uphold professional standards.

Question 9

Acceptance Procedure - Evaluate Existing Resources

Answer 9

• Auditors assess whether the firm has adequate time, staff, and expertise to conduct the audit thoroughly.
• Lack of resources can hinder audit quality, especially if the client requires specialised skills or intensive hours.

Question 10

Acceptance Procedure - Obtain References

Answer 10

• References help gather information on the professional reputation of the client’s management if they are not personally known to the auditor.
• This can include checking business relationships and previous dealings with other companies.

Question 11

Acceptance Procedure - Communicate with Present Auditors

Answer 11

• With the client’s permission, auditors contact previous auditors to learn of any relevant issues or reasons for the auditor change.
• If permission is denied, the new auditor may consider this a red flag and typically declines the engagement.
• Professional clearance is required

Question 12

Acceptance Procedure - Assess Client Management Integrity

Answer 12

• This step involves assessing whether management has a reputation for honesty and reliability.
• Concerns over integrity can indicate potential misstatements or attempts to mislead auditors, increasing audit risk.

Question 13

Why do we assess a client risk profile?

Answer 13

• Auditors determine if the client represents high risk due to factors like an unstable industry, financial instability, or a history of non-compliance.
• High-risk clients may require additional controls or even be declined if risks exceed acceptable thresholds.

Question 14

If I have a high risk client what should I consider in my audit?

Answer 14

Significant (more testing)
Experienced Staff
Higher fee or flex payment plan
Allocate more resources
Have a review partner to review the work at the end

Question 15

What are some factors that could indicate an audit client was high risk?

Answer 15

1. Management has low integrity
2. Short/Tight deadlines
3. Cash based business
4. Complex Structure/Complex transactions
5. Selling CompanyTrying to raise finances
6. History of non-compliance with laws and regulations
7. Past financial statement not true and fair
8. Past fraud
9. Internal control weakness
10. Industry is volatile with constant PEST (political, economic, social, and technological) changes impacting the company
11. Poor corporate governance
    Not a going concern
    Cashflow issues
    Activities (highly regulated industry)
    Geographical information

Question 16

What are some sources of information that could be sought about new clients?

Answer 16

1. References from solicitors and financers, if possible
2. Professional clearance from prior auditor or accountant if possible, publicly available information from web searches, information from Companies House search such as past financial statements, auditors report, confirmation statements
3. Google/News/Media/Industry publications
4. Regulator - publicly available information
5. Meet the directors
6. Data terminals e.g. Bloomberg

Question 17

What is the procedure if the prospective client does not allow contact with the previous auditors?

Answer 17

If they say NO: HIGH RISK: If the client refuses permission to contact previous auditors, the new auditor should typically decline the appointment.

If they say YES: Normally permission will be given, so the prospective auditors can write to the outgoing auditors. Us as the prospective auditor will ask the old auditors some questions (initial communication). The old auditors will then need to reach out to the client to ask if they can disclose information. If they say NO = HIGH RISK. if they say YES: Evaluate whether to act or not.

Question 18

Appointment decision chart

Answer 18

See image

Question 19

What are some factors that could indicate a high-risk audit client?

Answer 19

Unstable or high-risk industry.
High levels of debt or financial instability.
Frequent management or ownership changes.
Poor internal controls or history of non-compliance.

Question 20

True or False: Should an audit firm consider whether the firm is ethically barred from acting

Answer 20

TRUE

Question 21

True or False: Should an audit firm consider whether the firm has sufficient resources to carry out the engagement

Answer 21

TRUE

Question 22

True or False: Should an audit firm consider whether the firm can make sufficient profit from the engagement

Answer 22

TRUE - audit firm is still a business

Question 23

True or False: Should an audit firm consider whether the client is new to the firm

Answer 23

FALSE

Question 24

True or False: Should an audit firm consider whether the client gives permission to contact the outgoing auditors

Answer 24

TRUE

Question 25

After accepting an engagement, what are some procedures the auditor should perform? (4)

Answer 25

• Confirming the legality of the appointment - is it valid, more than 50% of shareholders need to approve that appointment.
• Ensure that the outgoing auditors’ removal (sacked) or resignation (left) has been properly conducted in accordance with national legislation.
• Set up and submit the engagement letter to the client (board of directors)
• Completing money laundering checks.

Question 26

Why and how must assurance firms comply with Money Laundering Regulations?

Answer 26

In order to comply with the Money Laundering Regulations, assurance firms must keep certain records about clients and undertake what is known as client due diligence.

To prevent involvement in money laundering by verifying client identities and ensuring compliance with legal requirements before starting any work.

Question 27

What is client due diligence in the context of money laundering?

Answer 27

It is the mandatory process of verifying the identity of all clients before undertaking any work, particularly if an ongoing relationship is expected or if transactions exceed €15,000.

Question 28

What types of identification checks should be performed for individuals/sole traders/partnerships in the context of money laundering checks?

Answer 28

1. Full name,
2. a photograph (such as a passport) and
3. proof of permanent address (such as a utility bill) should be obtained and kept on file until 5 years after the relationship has ended.

Question 29

What documentation is required for companies in the context of money laundering checks?

Answer 29

Assurance firms should collect the
1. Certificate of Incorporation,
2. registered address, and
3. Confirmation Statement (annual return for directors and shareholders).
4. Financial Statements

should be obtained and kept on file until 5 years after the relationship has ended.

Question 30

How long must records of identification checks be kept under Money Laundering Regulations?

Answer 30

Records must be retained for 5 years after the relationship with the client has ended.

e.g. if they were your client for 20 years you would kept the record for 25 years

Question 31

Why is it important to keep records of client identification for 5 years?

Answer 31

To ensure compliance with Money Laundering Regulations and to provide a trail for any necessary investigations or audits.

Question 32

What is the purpose of an engagement letter?

Answer 32

An engagement letter outlines the agreed terms of the audit, setting expectations and responsibilities for both the auditor and the client, ensuring a clear understanding before the audit begins.

Question 33

When should an auditor send an engagement letter to a new client?

Answer 33

The engagement letter should be sent soon after the auditor’s appointment and before the commencement of the first audit assignment.

Question 34

MACARONS in relation to an engagement letter

Answer 34

Management Responsibility - written rep, pass on information
Auditors Responsibility
Confirm Reports - 2 types: auditors (s/h) and management letter (directors)
Audit Opinion –> positive –> are they true and fair
Reporting framework - follow IFRS, CA2006
Objective of my firm is
No access restrictions
Scope - what am I actually auditing e.g. f/s and notes

M and A reduce expectations gaps

Question 35

What MUST be included in an engagement letter? (6)

Answer 35

The following items MUST be included in the engagement letter.
1. The objective of the audit of financial statements - should be clearly stated
2. The scope of the audit, which could include reference to applicable legislation, regulations
3. The auditor’s responsibility - include performing the audit according to standards and forming an opinion on the financial statements based on the evidence obtained.
4. The reporting framework that is applicable for the financial statements being prepared, for example International Financial Reporting Standards.
5. Management’s responsibility to prepare the financial statements and to provide the auditor with unrestricted access to whatever records, documentation and other information is requested in connection with the audit.
6. Confirmation of audit output and form of any reports

Question 36

What COULD be included in an engagement letter? (6)

Answer 36

When relevant, the following points COULD also be made:
1. Arrangements regarding the planning of the audit.
2. Expectation of receiving from management written confirmation of representations made in connection with the audit.
3. Basis on which fees are computed and any billing arrangements.
4. Arrangements concerning the involvement of other auditors and experts in some aspects
of the audit.
5. Arrangements concerning the involvement of internal auditors and other client staff.
6. Any restriction of the auditor’s liability when such possibility exists.

Question 37

How does an engagement letter help with issues related to auditor liability?

Answer 37

The engagement letter may outline any agreed limitations on liability, helping to manage the auditor’s risk exposure in certain cases.

Question 38

2 Which two of the following might indicate that an assurance client could have higher than normal inherent or control risk?
A Poor recent performance
B Strong internal controls
C Unusual transactions
D The existence of an internal audit department

Answer 38

A Poor recent performance C Unusual transactions
Poor recent performance may indicate a high risk that the company may misstate its financial statements in order to show improved recent performance. A company carrying out unusual transactions would also be a high risk, as each transaction would require a separate understanding leading to a higher risk of error. Strong internal controls and the existence of an internal audit department would be low risk indicators.

Question 39

3 Claret LLP, an assurance firm, has the following two clients among its client portfolio. For each client, select whether inherent risk is high or low.
Tulip Ltd is planning to list on the local stock exchange within the next two years.
A High risk
B Low risk
Dhalia Ltd is currently facing financial difficulties and is seeking alternative forms of finance.
C High risk
D Low risk

Answer 39

3 Correct answer(s): A High risk
Given its intention to list on the stock exchange, Tulip Ltd may be motivated to show a better picture of itself than that which exists, hence it is a high-risk client.

Correct answer(s): C High risk
Dhalia Ltd is a high-risk client given that it is seeking alternative forms of finance. It has the incentive to show itself as a healthier company than it actually is in order to attract the finance it requires. There is also a risk of misstatement if the financial statements do not properly reflect any going concern problems which the company may have. SAMPLE EXAM

Question 40

7 Which one of the following correctly describes the period for which client identification documents must be kept under money laundering regulations?
A For a minimum of five years and until five years have elapsed since the relationship with the client has ceased
B For a minimum of seven years and until seven years have elapsed since the relationship with the client has ceased
C For a minimum of five years and until seven years have elapsed since the relationship with the client has ceased
D For a minimum of seven years and until five years have elapsed since the relationship with the client has ceased

Answer 40

A For a minimum of five years and until five years have elapsed since the relationship with the client has ceased
The Money Laundering Regulations state that client identification documents must be kept for a minimum of five years and until five years since the relationship elapses.

Question 41

8 Which two of the following must be included in the engagement letter?
A The responsibilities of the auditor
B Arrangements regarding the planning and performance of the audit
C The form of any reports
D Basis on which fees are computed

Answer 41

A The responsibilities of the auditor
C The form of any reports
Arrangements regarding the planning and performance and the basis of the fee calculation are not essential to be included in the engagement letter, whereas the responsibilities of the auditor and the form of any reports must be included in the engagement letter.

Question 42

Which one of the following best describes professional scepticism? The assurance provider should:
A not believe anything that management tells him
B not believe anything that management tells him, without obtaining supporting evidence
C apply a questioning mind to the information and evidence he obtains
D always assume the worst outcome in cases of uncertainty

Answer 42

C apply a questioning mind to the information and evidence he obtains
Apply a questioning mind to the information and evidence he obtains would indicate professional scepticism. The alternative options offered are all a step too far. SAMPLE EXAM

Question 43

Which two of the following must be included in the engagement letter?
A The scope of the audit
B The reporting framework that is applicable for the financial statements being prepared
C Details of client identification procedures to be performed in relation to the Money Laundering Regulations
D A statement that, in accordance with the Companies Act 2006, the auditor’s liability cannot be restricted

Answer 43

A The scope of the audit
B The reporting framework that is applicable for the financial statements being prepared
Verifying the client’s identity would be performed before the engagement letter is prepared and signed.