Chapter 2: Process of assurance: obtraining an engagemtn

Question 1

Obtaining an engagement is done in which two ways?

Answer 1

1. Considerations
prior to acceptance
2. Procedures after
accepting the
engagement

Question 2

What is considered prior to acceptance of an audit engagement?

Answer 2

1. Sources of
information
2. Appointment
decision
process
3. Money
laundering
check

Question 3

What are the key methods of obtaining an engagement?

Answer 3

1. tender
2. Advertising
3. accountant invited by client

Question 4

What are the factors to consider before an audit engagement?

Answer 4

1. Are we professionally qualified?
2. Is it communicated with existing or previous auditors
3. Are there adequate resources available?
4. Requirements for Money laundering regulations complied?
5. Assessed the level of management integrity
6. Assessed level of risk

Question 5

You work for Star LLP, a small firm of accountants with four partners and two
offices in York and Newcastle.
The firm has been approached by two potential clients.
Thomas Ltd
Thomas Ltd has just sacked its auditors due to a disagreement over the
valuation of its properties, and has put the audit out to tender. The company
has invited a large number of firms to tender, in the hope that competition will
keep the audit fee low. The Managing Director is the sole shareholder with a
reputation for being a very persuasive character. You are aware that:
 The Finance Director has recently left and is claiming constructive
dismissal after having problems working with the MD.
 Several members of staff have left the company after a short period of
time and it now uses a number of temporary staff in its admin and finance
departments.
Thomas Ltd has outlets in 30 locations across England and Wales, with its
head office in York.
James Ltd
This three year -old company is expanding quickly, and has good results, a
sound financial position and is owned and managed by an experienced Board
of Directors following a management buyout from a large international group.
James Ltd is looking for a firm of accountants that can help them expand from
Yorkshire into the north-east of England.
The previous auditor is a retiring sole practitioner, and being a long-standing
friend of Star LLP’s managing partner, he has recommended the firm to
James Ltd.
From the information provided, what factors would you consider in
deciding whether to proceed further with the opportunities to work

Answer 5

Thomas ltd -> Ethical point that contradicts
Find out from previous auditor what the disagreement was about
Management integrity
The dominant shareholder difficult to work worth.
Lack of finance director and change of staff could lead to errors
The geographical spread is a challenge for a small audit firm.
Do not consider

James Ltd -> When information are passed on ML regulations followed?
Due diligence work
They may require also more than just an audit also someone to value the expansion

Question 6

What source of information do we require for new a)clients b)external c)auditor to perform audit

Answer 6

Client: a) Financian statement b) internal audit report c) MI
External: a) Credit rating b) banker, solicitors c) laws and regulaton d) internet search
Auditor: a) previous auditor

Question 7

Which one of the following would most likely lead you to decline the
appointment as auditor of a prospective new client?
 The previous year’s accounts were regarded as not showing a true and
fair view by the outgoing auditors.
 The client asked that you have no contact with the outgoing auditor, as the
two parties are currently in dispute.
 The assignment would involve a higher degree of risk than most of your
existing clients

Answer 7

The client asked not to contact the old auditor therefore reject the appointment

Question 8

What will be used for money laundering check for individuals and companies?

Answer 8

Individuals: photo ID and doc with name written
Companies: identification from companies house

Question 9

When are audit engagement letters issued?

Answer 9

After the auditors have accepted nomination

Question 10

What is the purpose and practicality of accepting the engagement?

Answer 10

• define the extent of firms and management responsibilities
• minimise misunderstanding client vs firm
• provide written confirmation on a) firms acceptance of appointment b) scope of enagegemnt c)form of report issued
• send to all clients
• ASAP after appointment

Question 11

What must an engagement letter cover in ISA 210

Answer 11

• Objectives of work/auditors
• Managements responsibilities
• scope of work
• form of any reports
• level of access to books and records
• reporting framework

Question 12

What may an engagement letter cover in ISA 210

Answer 12

• Inherent limitations of the engagement
• expectation re: written management representations
• Confidentiality/restricted circulation
• Arrangements re: reliance on internal audit
• restrictions on auditors liability

Question 13

Engagement letters should be sent to: (PICK ONE)
 Only audit clients
 Only listed clients
 All new clients going forward
 All new clients and existing clients where one has not been previously sent

Answer 13

Engagement letters should be sent to all clients, new and existing and updated
where necessary.