Client Investigation & Acceptance

Question 1

What four factors should auditors consider before accepting a new audit client?

Answer 1

1. Management integrity
2. The client’s financial strength
3. The auditor’s expertise and independence
4. Conflicts with existing clients

Question 2

Where should auditors look to obtain information about a prospective client’s ethical integrity?

Answer 2

1. Criminal background checks
2. Private investigators
3. Client’s attorneys
4. Inquiry of prior auditors
5. Customer reviews/Better Business Bureau

Question 3

Where should auditors look to obtain information about a prospective client’s financial strength?

Answer 3

1. Financial statements.
2. Credit reports.
3. Bond ratings
4. Stock analyst forecasts

Question 4

What should a successor auditor ask the predecessor before accepting a new audit engagement?

Answer 4

1. Cooperativeness and trustworthiness of management.
2. Reason for change in auditors.
3. Size and nature of misstatements discovered in previous audits.

Question 5

What disclosures does the SEC require when a public company changes auditors?

Answer 5

The client must file an 8-K report disclosing the change in auditor, and must disclose any disagreements with the auditor during the previous three years.

Question 6

What matters should be documented in the engagement letter for a financial statement audit?

Answer 6

1. The nature and scope of the audit
2. Auditor’s responsibility to comply with GAAS.
3. Mgmt’s responsibility to follow GAAP.
4. Mgmt’s responsibility to provide auditor access to records and supporting evidence.
5. Mgmt’s responsibility to correct material misstatements.
6. Estimated fees and payment schedule.