Chapter 3 - Accepting Engagements

Question 1

stages of an audit for an auditor?

Answer 1

acceptance
planning
evidence
conclusion & reporting

Question 2

most common method of obtaining an audit for an audit firm?

Answer 2

by tender

Question 3

tender?

Answer 3

when firms bid to carry out the audit

Question 4

what happens during a tender?

Answer 4

firms will set out reasons why they should be chosen to carry out the audit

e.g., proposed fee, quality of service, industry knowledge, proposed personnel

Question 5

is the audit fee important in accepting engagements?

Answer 5

yes

audit firms will charge whatever they feel appropriate for the engagement

Question 6

lowballing?

Answer 6

name given to instances where one charges less than the market rate for the audit

Question 7

ethical codes around audit engagement fees?

Answer 7

personnel
importance of work to client
degree of risk
nature of client business
expenses incurred
time taken for work

all of the above should determine and justify the audit fees

Question 8

ISA 220?

Answer 8

requires the auditor to obtain information considered necessary in order to decide whether to continue an engagement or accept a new one

Question 9

which matters should be considered when accepting an engagement?

Answer 9

risk analysis
ethical considerations
resources
companies act 2006

Question 10

risk analysis?

Answer 10

a preliminary risk assessment should be carried out before acceptance

Question 11

reasons for risk analysis prior to acceptance?

Answer 11

• to identify clients that are too high risk to take on
• determine an appropriate audit fee
• develop an initial understanding of areas that require more work

Question 12

ethical considerations when accepting an engagement?

Answer 12

auditor should consider whether the firm and the engagement team can comply with relevant ethical requirements

Question 13

ethical considerations for prospective auditors?

Answer 13

• ask the prospective client for permission to contact the existing auditor
• contact the existing auditor seeking information which could influence the decision to accept appointment
• consider the existing auditor’s reply

Question 14

ethical considerations for existing auditors?

Answer 14

• seek client permission to communicate with the prospective auditor
• respond to requests for information
• state whether or not there are matters of concern to prospective auditors

Question 15

how is mutual respect shown by prospective auditors?

Answer 15

developing a good working relationship with outgoing auditor and client

Question 16

what must firms consider when accepting engagements regarding resources?

Answer 16

firm must consider if they have sufficient experienced/qualified staff available to carry out the audit in time

Question 17

companies act 2006 role in relation to accepting engagements?

Answer 17

sets out legal requirements in relation to the appointment of auditors

Question 18

who may auditors be appointed by?

Answer 18

• the directors
• the shareholders
• the secretary of state

Question 19

when do directors appoint auditors?

Answer 19

only when:

they need to fill a casual vacancy

first time appointing auditors

Question 20

when does the secretary of state appoint auditors?

Answer 20

rarely

only when no auditor has been appointed by the time the audit is required

Question 21

preconditions for an audit?

Answer 21

auditors should only accept an engagement if the ‘preconditions for an audit’ are present

Question 22

ISA 210 says the auditor shall do what in relation to preconditions for an audit?

Answer 22

the auditor shall:

• determine whether the FR framework applied is acceptable
• obtain agreement of management that it acknowledged its responsibilities

Question 23

if preconditions aren’t present…

Answer 23

the auditor should discuss the matter with management

auditor shouldn’t accept the engagement

Question 24

ISA 210?

Answer 24

requires that terms of audit engagement are put in writing and sets out contents of the engagement letter

Question 25

two sections to an engagement letter?

Answer 25

purpose (set out terms of engagement, contract between auditor & client)

main contents (objective/scope, responsibilities, form & content of reports, auditor’s rights)

additional contents (basis of fees, practicalities, need for written representation, timetable)

Question 26

is a new engagement letter required for recurring audits?

Answer 26

no

only when terms of engagement change or board members change

Question 27

is an engagement letter necessary for other assurance engagements?

Answer 27

yes

arguably more necessary, as the scope/variation in the work could be broader

Question 28

who sets out legal requirements when auditors cease to hold office?

Answer 28

companies act 2006

Question 29

duty & rights of an outgoing auditor when resigning?

Answer 29

prepare & submit a statement of circumstances to the company’s registered office

prepare written representations to be circulated to the members of the company

Question 30

what happens to requirements when a company is listed?

Answer 30

requirements are stricter

Question 31

duty & rights of an outgoing auditor when being removed?

Answer 31

prepare & submit a statement of circumstances to the company’s registered office

prepare written representations to be circulated to the members of the company