Module 14 Audit Process engagement and client management

Question 1

Throughout the audit process, what are the two elements that are ongoing from start to finish?

Answer 1

Risk assessment

Engagement and client management

Question 2

What is ISQC (UK) 1 and what are the requirements?

Answer 2

This is quality control for firms that perform audits and reviews of financial statements, and other assurance and related service engagements.

ISQC UK 1 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 the applicable laws and regulations.

This helps audit firms avoid litigation and to control risks.

Question 3

What is ISA (UK) 220 and what is the requirement?

Answer 3

ISA (UK) 220 Quality control for an audit of financial statements

ISA (UK) 220 requires audit firms to assign an engagement partner for each audit engagement and clarifies that the engagement partner has responsiblity for the direction, supervision and performance of the audit engagement in compliance with professional standards, regulatory and legal requirements.

Question 4

What is the importance of audit workpapers?

Answer 4

Auditors must be able to provide evidence demonstrating that the audit has been completed. Documentation of all audit work and all material matters of judgement during the audit is vital.

Question 5

What is the purpose of reviewing audit workpapers?

Answer 5

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 6

What must audit workpapers include?

Answer 6

It must include:

Who performed the audit work and the date it was completed

Who reviewed the audit work and the date and extent of such review (usually audit manager/audit senior)

Question 7

What is ISA (UK) 230 and what are the requirements?

Answer 7

ISA (UK) 230 Audit Documentation

This sets out the standards required for the content of the auditor’s working papers. Essentially if an unconnected auditor was to read the audit file, they should be able to understand the procedures and judgements underlying the opinion given in the audit report.

Question 8

What are the three quality control standards that provide guidance to auditors?

Answer 8

ISQC (UK) 1 - Quality control for firms that perform audits and reviews of financial statements, and other assurance and related service engagements.

ISA (UK) 220 - Quality control for an audit of financial statements

ISA (UK) 230 - Audit Documentation

Question 9

What is ISA (UK) 260?

Answer 9

ISA (UK) 260 - Communication with those charged with Governance

ISA (UK) 260 requires auditors to communicate to those charged with governance regarding:

The auditor’s responsiblities in relation to the financial statement audit

The planned scope and timing of the audit

Significant findings from the audit

Auditor independence

Question 10

For ISA (UK) 260, what are the significant findings that should be communicated to those charged with governance?

Answer 10

Views on the qualitative aspects of the entity’s accounting practices and financial reporting (ie, accounting policies or estimates)

Significant difficulties (if any) encountered during the audit

Unless all those charged with governance are involved in day to day management, significant audit matters discussed with management and details of written representations requested by the auditor

Circumstances that affect the form and content of the auditors report (such as the need to modify the audit opinion)

Any other significant matters that are judged relevant by the auditor

Question 11

What does the engagement letter do?

Answer 11

ISA (UK) 210 - Agreeing the terms of audit engagements provides the auditor with guidance regarding the content and the timing of the engagement letter.

The engagement letter sets out the agreed terms between audit and client and acts as a contract serving to protect both parties and reduce the risk of misunderstandings in relation to the engagement.

Question 12

ISA (UK) 210 highlights what must be included in the engagement letter, what are these?

Answer 12

The objective and scope of the audit of the financial statements

The responsiblities of the auditor

The responsiblities of management

Indentificaiton of the applicable financial reporting framework for the preparation of the financial statements

Reference to the expected form and content of any reports to be issued by the auditor including a statement that there may be circumstances in which a report may differ from the expected form and content

Question 13

What does ISA (UK) 210 state that auditor must obtain from management?

Answer 13

It states that it must obtain the agreement of management that it acknowledges and understands its responsiblity for:

Preparing accurate financial statements in accordance with an acceptable financial 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 14

In what circumstances does ISA (UK) 210 suggest that a new letter of engagement to be issued?

Answer 14

there is any indication that the client has misunderstood the objective or scope of
the audit;
• there are any revised or special terms of the audit engagement;
• there have been significant changes of senior management;
• there have been significant changes in ownership of the entity;
• there have been significant changes in legal or regulatory requirements;
• there has been a change in the financial reporting framework adopted in the
preparation of the financial statements;
• there has been a significant change in the nature of the client’s business; or
• there has been a change in other reporting requirements.

Question 15

What is involved in the planning stage of an audit?

Answer 15

This is when the audit team develop their understanding of the entity so that they can work out where to focus their attention. They will focus on the areas most likely to contain incorrect information that would impact the users of the financial statements

Question 16

What is the output document from the planning stage of audit?

Answer 16

The audit strategy memorandum - it summarises the key decisions made during the planning phase such as results of risk assessment, audit strategy, materality levels and also administrative details. This is internal and should not be given to audit client.

Question 17

What does the audit strategy memorandum include for content?

Answer 17

B SSMART

Background client information - industry, year end date, financial reporting framework and any changes since prior year

Systems and Control information - Overview of the key processes, systems and control framework in place at the client

Staffing and key client contacts - FD or payroll manager

Materiality - Overall, performance and specific items materiality figures will be included. Method used to calculate materiality and judgements are also included.

Analytical procedure results - Explanation of the planning analytical review performed as part of the auditors risk assessment procedures.

Risk assessment findings and procedures planned in response - Summary of the ROMM identified and what approach will be adopted in auditing the risks identified

Timetable - Key dates for audit planning meeting, year end, meetings with client, onsite days and reporting deadlines for the engagement

Question 18

What is the audit planning meeting?

Answer 18

This meeting involves the engagement partner and key engagement team members and they discuss the ROMM at the entity (including ROMM due to fraud risk)

Question 19

What is the systems, controls and completion stage of the audit?

Answer 19

This is when the auditor will understand the internal control system of the client (including the accounting information systems) and test how well the client’s systems can prevent and/or detect incorrect information materialising in the accounts. (this work is built upon throughout the remaining stages of the audit)

Question 20

What is the ISA (UK) 265?

Answer 20

ISA (UK) 265 - Communicating deficiencies in internal control to those charged with governance and management

Any material weaknesses in a client’s accounting and internal control system specifically are reported to the management promptly (ASAP, even if during interim process then still issue it and issue a final one after completion of audit) and in writing. This is often included in a management letter.

Question 21

What two ISA does the management letter allow to meet?

Answer 21

ISA UK 265

ISA UK 260

Question 22

What is a management letter?

Answer 22

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

It should be constructive and include:

The issue
The impact of the issue
A recommendation for management to resolve the issue

Question 23

Who is the mangement letter addressed to?

Answer 23

Usually addressed to the board of directors and the audit committee. Auditors should obtain written feedback/responses from the client to the issues identified.

Question 24

What is the additional requirement of ISA (UK) 220 for listed companies?

Answer 24

A separate engagement quality control reviewer (EQCR) to be appointed for each listed company audit. The review is independent of the engagement and 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 is also responsible for completing a quality control review and the engagement partner cannot issue the audit report until the review has been completed.

Question 25

What is included in a quality control review by the engagement quality control reviewer?

Answer 25

Discussions of significant matters

Review of the financial statements and the proposed audit report

Review of selected audit documentation relating to any significant judgements made by the engagement team

An evaluation whether the conclusions reached are appropriate and whether the proposed audit report is appropriate

A consideration of the engagement teams assessment of the firms independence from the client

An assessment of whether appropriate consultations have taken place on difficult matters

As assessment of whether audit documentation selected for review reflects the work performed and supports the judgements and conclusions reached.