Chapter 2 - Process of assurance: obtaining an engagement Flashcards
Are accountants permitted to advertise for clients?
Yes. Accountants are permitted to advertise for clients within certain professional guidelines
Can accountants be invited to tender for particular engagements?
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.
What are four acceptance procedures that nominee auditors must carry out before accepting a new audit client?
Ensure professionally qualified to act - consider if disqualified on legal or ethical grounds, for example, conflict of interest.
Ensure existing resources adequate
Obtain references
Communicate with present auditors - client must be asked to give permission for the communication to occur. If the client refuses, the proposed auditors should normally decline the appointment.
What are six signs that a client is likely to be low risk?
Good long term prospects
Well-financed
Strong internal controls
Conservative, prudent accounting policies
Complete, honest management
Few unusual transactions
What are six signs that a client is likely to be high risk?
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
What should be done when a company’s audit is determined as anything other than low risk?
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.
Should expected fees from a new client reflect the level of risk expected?
Yes.
Generally, the expected fees from a new client should reflect the level of risk expected.
What are four sources of information about new clients?
Enquiries of other sources
Review of documents
Previous accountants/auditors
Review of rules and standards
What three procedures should be carried out after accepting nomination?
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.
Once an appointment has taken place, what should the new auditors obtain from the outgoing auditors?
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.
For how long should client documentation be kept?
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.
What are the two purposes of an engagement letter?
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.
What does ISA (UK) 210, Agreeing the Terms of Audit Engagements require?
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.
What are six items that must be included in an engagement letter?
The objective of the audit of financial statements
The scope of the audit
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
The form of any reports of results of the engagement
What are thirteen optional other items that the auditor may wish to include in the engagement letter?
The form of any other communication of the results of the engagement
Recognising that there is an unavoidable risk that some material misstatements may remain undiscovered
Arrangements regarding the planning of the audit
Expectation of receiving from management written confirmation of representations made in connection with the audit
Agreement of the client to provide the auditor with information in time
Basis on which fees are computed and any billing arrangements
Request for the client to confirm the terms of the engagement by acknowledging receipt of the engagement letter
Where relevant:
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
Arrangements to be made with the predecessor auditor, if any, in the case of an initial audit
Any restriction of the auditor’s liability when such possibility exists
A reference to any further agreements between the auditor and the client
Any obligations to provide audit working papers to other parties
