Chapter 5: Acceptance Procedures

Question 1

Which Acceptance and Continuance Procedures should be performed by auditor before accepting an engagement.

Answer 1

1. Whether audit firm has sufficient staff, technical competence, necessary time and resources to perform the engagement.
2. Integrity of owners, directors and management of client.
3. Whether firm and engagement team can comply with legal and ethical requirements (particularly relating to independence).
4. Auditor also considers significant matters arose during previous engagements.
5. Preconditions of Audit are Present

If any threats are identified, they must be addressed by auditor and further procedures should be performed to reduce the threats.

[Chapter 5: LO 1]

Question 2

Which Threats can arise at Acceptance Stage of a new audit client?

Answer 2

Acceptance of a new client may create:
 Self-interest threat to compliance with principle of Integrity and Professional behavior because client may be involved in illegal activities or questionable financial reporting practices.
 Self-interest threat to compliance with principle of Professional Competence and Due Care if firm is not competent to perform the engagement.

[Chapter 5: LO 1]

Question 3

List down the factors relevant to evaluate Self-Interest Threat to Integrity or Professional behavior at Acceptance Stage

Answer 3

 Knowledge and understanding of client, its owners, management and TCWG.
 Client’s commitment to address the questionable issues e.g. through improving corporate governance practices or internal controls.

[Chapter 5: LO 1]

Question 4

List down the factors relevant to evaluate Self-Interest Threat to Professional competence and due care at Acceptance Stage:

Answer 4

 Understand nature of client business, complexity of operations, requirements of the engagement, purpose and scope of engagement.
 Knowledge of relevant industries or subject matter.
 Experience with relevant regulatory or reporting requirements.
 Existence of firm’s quality control policies and procedures designed to provide reasonable assurance that specific engagements are accepted only when they can be performed competently.

[Chapter 5: LO 1]

Question 5

What are the Procedures/Safeguards to address threats at Acceptance Stage:

Answer 5

 Agree realistic timeframe for performance of the engagement.
 Assign sufficient staff with necessary skills.
 Using experts where necessary.
[Note for students: Same safeguards can be mentioned for both types of threats at acceptance stage].

[Chapter 5: LO 1]

Question 6

What should be Auditor’s Procedures after he has decided to accept a Client/Engagement:

Answer 6

1. Auditor should communicate its consent to client company before AGM.
2. Auditor should ensure that removal of predecessor auditor, and appointment of auditor is in accordance with **legal requirements **(e.g. through minutes of AGM). Appointment should be properly documented.
3. Auditor should prepare and submit **engagement letter **to the client.

[Chapter 5: LO 1]

Question 7

What action should be taken by Incoming Auditor regarding communication with Outgoing Auditor.

Answer 7

1. Obtain written permission from client to contact with predecessor auditor (due to confidentiality principle).
2. If client gives permission, write letter to predecessor auditor to identify any matters relevant to acceptance decision (e.g. integrity of management, overdue fee, disagreement, inappropriate scope limitation)
3. If client does not give permission, this will be a scope limitation before acceptance. Incoming auditor should not accept the engagement.
4. If predecessor auditor responds indicating some issues affecting acceptance decision, incoming auditor may still accept the engagement after **applying necessary safeguards. **
5. If predecessor auditor does not respond, proposed auditor should try to obtain relevant information from other sources (e.g. through inquires of third parties or background investigation regarding senior management or TCWG of client).

[Chapter 5: LO 2]

Question 8

What action should be taken by Outgoing Auditor regarding communication with Incoming Auditor.

Answer 8

1. Obtain written permission from client to reply to incoming auditor (due to confidentiality principle).
2. If permission is given by client, write as soon as possible to proposed auditor honestly stating the relevant facts.
3. If client does not give permission, inform proposed auditor about non-permission. This will be scope limitation before acceptance. Incoming auditor should not accept the engagement.

[Chapter 5: LO 2]

Question 9

List down the Threat and Safeguards when an Additional Chartered Accountant is approached for a work Complementary to Existing Chartered Accountant.

Answer 9

Threats:
Threat to professional competence and due care due to lack of information.

Safeguards:
Obtain permission of client, and
1. Proposed accountant should notify existing chartered accountant of the proposed work.
2. Existing accountant should provide any relevant information needed for the proper conduct of work.
3. One copy of opinion is sent** to existing accountant.**

[Chapter 5: LO 3]