Chapter 2 - Process of assurance: obtaining an engagement

Question 1

Are accountants permitted to advertise for clients?

Answer 1

Yes. Accountants are permitted to advertise for clients within certain professional guidelines

Question 2

Can accountants be invited to tender for particular engagements?

Answer 2

Yes. Accountants are often invited to tender for particular engagements, which means that they offer a quote for services, outlining the benefits of their firm and personnel, usually in competition with other firms which are tendering at the same time.

Question 3

What are that acceptance procedures that nominee auditors must carry out before accepting a new audit client?

Answer 3

Also consider whether the client is likely to be high or low risk to the firm in terms of being able to draw an appropriate assurance

Question 4

What are six signs that a client is likely to be low risk?

Answer 4

• Good long term prospects
• Well-financed
• Strong internal controls
• Conservative, prudent accounting policies
• Complete, honest management
• Few unusual transactions

Question 5

What are six signs that a client is likely to be high risk?

Answer 5

• Poor recent or forecast performance
• Likely lack of finance
• Significant control weaknesses
• Evidence of questionable integrity, doubtful accounting policies
• Lack of finance director
• Significant unexplained transactions or transactions with connected companies

Question 6

What should be done when a company’s audit is determined as anything other than low risk?

Answer 6

Where the risk level of a company’s audit is determined as anything other than low, then the specific risks should be identified and documented and an appropriate decision must be taken in whether the client is to be accepted

Question 7

Should expected fees from a new client reflect the level of risk expected?

Answer 7

Yes.

Generally, the expected fees from a new client should reflect the level of risk expected.

Question 8

What are four sources of information about new clients?

Answer 8

• Enquiries of other sources
• Review of documents
• Previous accountants/auditors
• Review of rules and standards

Question 9

What three procedures should be carried out after accepting nomination?

Answer 9

• Ensure that the outgoing auditors’ removal or resignation has been properly conducted in accordance with national legislation.
• Ensure that the new auditors’ appointment is valid. The new auditors should obtain a copy of the resolution passed at the general meeting appointing them as the company’s auditors.
• Set up and submit a letter of engagement to the directors of the company.

Question 10

Once an appointment has taken place, what should the new auditors obtain from the outgoing auditors?

Answer 10

Once a new appointment has taken place, the new auditors should obtain all books and papers which belong to the client from the outgoing auditors. The outgoing auditors should ensure that all such documents are transferred promptly, unless they have a lien (a legal right to hold on to them) because of unpaid fees.

Question 11

For identification checks, what documentation should the new auditors obtain for individuals and for companies?

Answer 11

Question 12

For how long should client documentation be kept?

Answer 12

Client identification documents must be kept for a minimum of five years and until five years have elapsed since the relationship with the client in question has ceased.

Question 13

What are the purposes of an engagement letter?

Answer 13

define clearly the extent of the firm’s responsibilities and so minimise the possibility of any misunderstanding between the client and the firm.

• Provide written confirmation of the firm’s acceptance of the appointment
• The scope of the engagement and the form of their report.

Question 14

What does ISA (UK) 210, Agreeing the Terms of Audit Engagements require?

Answer 14

ISA (UK) 210, Agreeing the Terms of Audit Engagements requires that the auditor and the client agree on the terms of the engagement. The agreed terms must be in writing and the usual form would be a letter of engagement.

Question 15

What are six items that must be included in an engagement letter?

Answer 15

• The objective of the audit of financial statements
• The scope of the audit, which could include reference to applicable legislation, regulations
• The auditor’s responsibility
• The reporting framework that is applicable for the financial statements being prepared, for example International Financial Reporting Standards
• 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
• Confirmation of audit output and form of any reports

Question 16

What are thirteen optional other items that the auditor may wish to include in the engagement letter?

Answer 16

• Arrangements regarding the planning of the audit
• Expectation of receiving from management written confirmation of representations made in connection with the audit
• Basis on which fees are computed and any billing arrangements
• Arrangements concerning the involvement of other auditors and experts in some aspects of the audit
• Arrangements concerning the involvement of internal auditors and other client staff
• Any restriction of the auditor’s liability when such possibility exists

Question 17

When should a letter of engagement be sent?

Answer 17

The auditors should send an engagement letter to all new clients soon after their appointment as auditors and, in any event, before the commencement of the first audit assignment.