Module 14: Audit Process: Engagement and Client Management

Question 1

What are the key quality control standards that provide guidance to the auditor?

Answer 1

ISQC (UK) 1 Quality control for firms that perform audits and reviews of financial statements, and other assurance and related services engagements.
ISA (UK) 220 Quality and control for an audit of financial statements
ISA (UK) 230 Audit documentation

Question 2

What does ISQC (UK) 1 require?

Answer 2

Requires audit firms to ensure that they have adequate recruitment, performance evaluation and training procedures to make certain that staff are committed to ethical principles and have the capabilities and competence necessary to perform engagements in accordance with law.

Question 3

What does ISA (UK) 220 require?

Answer 3

Requires audit firms to assign an engagement partner for each audit engagement and clarifies that the engagement partner has responsibility for the direction, supervision and performance of the audit engagement in accordance with laws and regulations.

Question 4

What is the purpose of reviewing working papers ?

Answer 4

To ensure that sufficient, appropriate evidence has been gathered to support the audit report
Judgements and conclusions drawn are appropriate
The requirements of the auditing standards and company law have been fulfilled.

Question 5

How can an auditor demonstrate that they have performed an audit in accordance with the relevant legislation, regulations and standards ?

Answer 5

Only through documentation. All working papers must include:

1. Who performed the audit work and the date it was completed
2. Who reviewed the audit work and the date and extent of such review.

Question 6

What is an engagement letter?

Answer 6

The engagement letter acts as a contract between the practitioner and the client, serving to protect both parties and reduce the risk of misunderstandings in relation to the engagement.

Question 7

What are the elements that must be included in the engagement letter (ISA 210)?

Answer 7

1. The objective and scope of the audit of the financial statements
2. The responsibilities of the auditor
3. The responsibilities of management
4. Identification of the applicable financial reporting framework for the preparation of the financial statements
5. Reference to the expected form and content of any reports

Question 8

What is the additional information that could be included in the engagement letter?

Answer 8

Fee and billing details

Arrangements regarding planning and performance of audit such as composition of audit team.

Question 9

What must management acknowledge and understand responsibility for?

Answer 9

Preparing accurate financial statements in accordance with reporting framework
Ensuring proper internal controls over the preparation of financial statements are in place
Providing the auditor with access to all records and providing any explanations necessary

Question 10

What would be the reasons for issuing a new engagement letter?

Answer 10

1. Indication that the client has misunderstood the objective or scope of the audit
2. There are any revised special terms of the audit engagement
3. There have been significant changes of senior management
4. Significant changes in ownership of entity
5. Significant changes in legal or regulatory requirements
6. There has been a change in the financial reporting framework adopted in the preparation of the financial statements
7. There has been a significant change in the nature or size of the clients business
8. Change in other reporting requirements

Question 11

What is the audit strategy memorandum (ASM)?

Answer 11

ASM summarises the key decisions made during the planning phase, such as the results of the risk assessment, the audit strategy and materiality levels, and also administrative details.
ASM is internal document which shouldn’t be given to the audit client.

Question 12

Typical content of ASM? B SSMART

Answer 12

1. Background client information
2. Systems and control information
3. Staffing and key client contacts
4. Materiality
5. Analytical procedure results
6. Risk assessment findings and procedures planned in response
7. Timetable

Question 13

What does the management letter include

Answer 13

The management letter to communicate any significant weaknesses identified in the client’s internal control systems as well as any other significant matters such as misstatements or disagreements between auditor and management.

It should be constructive and identify:

1. The issue
2. The impact or implications
3. A recommendation for management to resolve the issue.

Should be addressed to board and audit committee

Question 14

What is an engagement quality control reviewer (EQCR)?

Answer 14

A EQCR should be appointed for each listed company audit. Reviewer will be independent of the engagement and as such will provide an objective assessment of the significant judgements made by the audit team and the conclusions reached in forming the audit opinion. The EQCR should be responsible for completing a quality control review before partner signs it off.

Question 15

The quality control review should include

Answer 15

1. Discussions of significant matters
2. Review of financial statements and the proposed audit report
3. Review of selected audit documentation relating to any significant judgements made by engagement team
4. An evaluation on whether the conclusions reached to support the audit report are appropriate and a consideration of whether the proposed audit report is appropriate
5. A consideration of the engagement team’s assessment of the firm’s independence from the client
6. An assessment of whether appropriate consultations have taken place on difficult matters
7. An assessment of whether audit documentation selected for review reflects the work performed and supports judgements and conclusions reached.