Lesson 2 - preliminary engagement activities

Question 1

What are the five main activities during the preliminary stages of the audit?

Answer 1

1. Establish whether pre-conditions of the audit are present.
2. Investigate prospective or existing clients.
3. Determine skills competence or resources.
4. Consider statutory or ethical requirements.
5. Establish the terms of the engagement.

Question 2

What are the pre-conditions of an audit (Pg6/10 of Auditing notes 2022/23)?

Answer 2

The preconditions of an audit are that:

• the financial reporting framework to be applied in the preparation of the financial statements to be audited is acceptable.
• the auditor obtains the agreement of management, that management acknowledges and understands its responsibility:
• for the preparation and fair presentation of the financial statements in accordance with a suitable reporting framework
• for such controls as management determines is necessary to enable preparation of financial statements
• for providing the auditor with access to all information of which management is aware that is relevant to the preparation of the financial statements.

Question 3

What considerations are made to determine competence or resources for an engagement (Pg6/12 AN 2022/23)?

Answer 3

To determine the competence for performing an engagement, the following must be considered:

• personnel who have knowledge of the client’s industry and the necessary experience of relevant regulatory and reporting requirements
• necessary technical skills and competence within the firm or access to the necessary skills
• necessary resources (staff, computer resources etc.)

Question 4

List three considerations the auditor must make to determine whether the firm complies with ethical requirements (Pg6/12).

Answer 4

• Potential conflicts of interest between the firm and the client.
• Threats to independence of the firm and safeguards against said threats.
• Any other situations leading to contraventions of the code of professional conduct of any member of the engagement team.

Question 5

Establishing the terms of the engagements:

What must be in the engagement letter as a minimum? (five points. Pg 6/13)

Answer 5

a) Objectives of the audit should be clearly stated
b) The scope of the audit
c) The responsibilities of the auditor
d) Responsibilities of management
e) Reference to expected form or content of any reports to be issued by the auditor.

Question 6

Which ISQM 1 paragraph refers to the firms ability to in accordance with professional standards.

Answer 6

Paragraph A72.

Question 7

Which ISQM 1 paragraph discusses considerations of the integrity and ethical values of the client?

Answer 7

Paragraph A68

Question 8

What does ISA 210 pertain to?

Answer 8

ISA 210: Agreeing the terms of the audit engagement.