Obtaining an engagment & Risk

Question 1

2 ways to get a client

Answer 1

• Putting together a proposal document and be invited to do a pitch
• Company can approach an audit firm directly

Question 2

Considerations prior to acceptance

Answer 2

The auditors need to make sure the audit isn’t too risky to take on There are three main things they therefore need to consider:

1) Client screening
2) Practical issues
3) Ethics

Question 3

Client screening

Answer 3

ISA 315 requires the auditor to gain a thorough understanding of the potential client
What do we need to know?
What does the company do?
Are management trustworthy?
How competent is the finance team?
Is the company in debt?
Are there legal and regulatory requirements?
Is the company in a strong financial position?

Where do we find out? 
Previously published accounts 
Trade publications 
Online/Internet 
Management information 
Previous auditor

Question 4

Practical issues

Answer 4

Auditors have to consider whether than can feasibly do the audit by looking at any practical issues that there may be.
They might consider some of the following:
 Sufficient resources? – is there enough staff available at the right time of year
 Money laundering issues? – can the auditors confirm the company is “real”
 Obtained professional clearance? – have the auditors been in touch with the previous auditor (if there is one!!!)
 Level of risk? – risk that the auditor might get the conclusion on the audit wrong

Question 5

Professional clearance

Answer 5

The professional clearance process listed above refers to a potential new auditor contacting a previous/current auditor to gather information to help decide about whether the new auditor should accept appointment.

A potential auditor must work through the following steps:

Request permission to contact old auditor. If permission is denied, appointment is refused

Permission given —> request relevant information

Old auditor requests permission to reply

Requested information is supplied. If it’s not supplied, appointment is refused

If supplied, accept/reject appointment

Question 6

Audit rotation

Answer 6

Over the last few years there have been changes affecting certain companies (mainly big companies listed on the stock exchange) regarding the length of time an audit firm can remain a company’s auditor.

How well positioned are shareholders to be able to make an informed decision regarding the auditor’s effectiveness?
What are the benefits of having a long relationship between a company and auditor?
What are the disadvantages?

Question 7

Engagement letter

Answer 7

The engagement letter is a letter sent from the auditor to ALL clients. It must be sent to new clients before any audit work is started. It is sent to repeat clients if there is a change in circumstances, otherwise the one in place just rolls forward.

The letter acts as a legally binding contract between the auditor and the client and its’ contents aims to mitigate misunderstandings between the two parties.

Question 8

Letter must include

Answer 8

Objective of work 
Scope of audit 
Auditor’s responsibilities 
Management responsibilities 
Reporting framework 
Form and content of report

Question 9

Letter may include

Answer 9

Level of reliance on internal audit
Limitations of the audit
Fee calculations
Audit of different client locations