Process of assurance: obtaining an engagement Flashcards
Are accountants permitted to advertise for clients?
Yes. Accountants are permitted to advertise for clients within certain professional guidelines
Can accountants be invited to tender for particular engagements?
Yes. Accountants are often invited to tender for particular engagements, which means that they offer a quote for services, outlining the benefits of their firm and personnel, usually in competition with other firms which are tendering at the same time.
Two key methods of obtaining an engagement:
- Tender
- Advertising
Matters to consider before tendering
- cost of preparing a tender, if we do not win
- what would be a fair and realistic fee
- can we deliver what we promise?
Contents of a tender document:
- amount and basis of fee
- requirements of an audit and other services required by the client
- selling points of the firm
Tendering
In a tender, the company invites a small number of audit firms to ‘pitch’ for the work. They will provide the firms with some information about the company and their requirements, as well as allowing a period where further questions will be asked. The firms, if interested, will complete a tender document, usually using a template provided by the prospective client, detailing what the firm can offer and why they should be picked. Each firm will then attend an interview or presentation where they can further sell themselves and take any questions the company may have. As a result of this, a decision will be made as to which firm to engage.
Factors to consider prior to acceptance of an audit:
- Are we professionally qualified to act?
- Have we communicated with existing or previous auditors?
- Do we have adequate resources available?
- Have we fulfilled the requirements to comply with the Money Laundering Regulations 2007?
- Have we assessed the level of management integrity?
- Have we assessed the level of risk?
What are six signs that a client is likely to be low risk?
Good long term prospects
Well-financed
Strong internal controls
Conservative, prudent accounting policies
Complete, honest management
Few unusual transactions
What are six signs that a client is likely to be high risk?
Poor recent or forecast performance
Likely lack of finance
Significant control weaknesses
Evidence of questionable integrity, doubtful accounting policies
Lack of finance director
Significant unexplained transactions or transactions with connected companies
What should be done when a company’s audit is determined as anything other than low risk?
Where the risk level of a company’s audit is determined as anything other than low, then the specific risks should be identified and documented.
Should expected fees from a new client reflect the level of risk expected?
Yes.
Generally, the expected fees from a new client should reflect the level of risk expected.
What are 3 sources of information about new clients?
- financial statements
- internal audit reports
- management accounts
what external information should be gathered before taking on a new client?
- credit ratings
- bankers, solicitors
- law and regulations
- internet research
for money laundering reasons, how long should client identification documents be kept for?
minimum of 5 years and until 5 years have elapsed since the relationship with the client has been ceased
What three procedures should be carried out after accepting nomination?
Ensure that the outgoing auditors’ removal or resignation has been properly conducted in accordance with national legislation.
Ensure that the new auditors’ appointment is valid. The new auditors should obtain a copy of the resolution passed at the general meeting appointing them as the company’s auditors.
Set up and submit a letter of engagement to the directors of the company.
all engagement letters must include:
- scope of the audit
- responsibilities of auditor and client management
- identification of financial reporting framework to be used
- level of access to books and records
- form and content of reports to be issued
reasons to update an engagement letter:
- new board members at the clients company
- new standards that need to be complied with
- the need to remind the client of their responsibilities
Once an appointment has taken place, what should the new auditors obtain from the outgoing auditors?
Once a new appointment has taken place, the new auditors should obtain all books and papers which belong to the client from the outgoing auditors. The outgoing auditors should ensure that all such documents are transferred promptly, unless they have a lien (a legal right to hold on to them) because of unpaid fees.
What are the two purposes of an engagement letter?
define clearly the extent of the firm’s responsibilities and so minimise the possibility of any misunderstanding between the client and the firm.
provide written confirmation of the firm’s acceptance of the appointment, the scope of the engagement and the form of their report.
What does ISA (UK) 210, Agreeing the Terms of Audit Engagements require?
ISA (UK) 210, Agreeing the Terms of Audit Engagements requires that the auditor and the client agree on the terms of the engagement. The agreed terms must be in writing and the usual form would be a letter of engagement.
What are thirteen optional other items that the auditor may wish to include in the engagement letter?
The form of any other communication of the results of the engagement
Recognising that there is an unavoidable risk that some material misstatements may remain undiscovered
Arrangements regarding the planning of the audit
Expectation of receiving from management written confirmation of representations made in connection with the audit
Agreement of the client to provide the auditor with information in time
Basis on which fees are computed and any billing arrangements
Request for the client to confirm the terms of the engagement by acknowledging receipt of the engagement letter
Where relevant:
Arrangements concerning the involvement of other auditors and experts in some aspects of the audit
Arrangements concerning the involvement of internal auditors and other client staff
Arrangements to be made with the predecessor auditor, if any, in the case of an initial audit
Any restriction of the auditor’s liability when such possibility exists
A reference to any further agreements between the auditor and the client
Any obligations to provide audit working papers to other parties
When should a letter of engagement be sent?
The auditors should send an engagement letter to all new clients soon after their appointment as auditors and, in any event, before the commencement of the first audit assignment.
what should be included in an engagement letter
- objectives of work/ auditors responsibilities
- scope of the audit
- reporting framework
- managements responsibilities to prepare financial statements
- form of any reports
- level of access to books and records
