Process of Assurance: Obtaining an Engagement Flashcards
Drew Brothers, chartered accountants, has recently accepted appointment as the auditor of Abysin Ltd. In terms of client due diligence, which two of the following documents should they check?
A. Certificate of Incorporation
B. Passport
C. Utilities bill
D. Annual return
<p>Certificate of incorporation and annual return (which should give details of registered office, shareholders and directors).
If taking on any work from individuals at the firm, should obtain information for them from their passports and utilities bills.</p>
<p>True/False
An audit firm must not accept an engagement is the client is not previously known to them</p>
<p>False
Although, if client is unknown to the audit firm, then they should seek references in respect to key personnel associated with the client and carry out due diligence</p>
<p>If a prospective client declines permission for the auditor to contact the previous auditors, what is the recommended action?</p>
<p>Decline the engagement</p>
<p>For an assurance engagement, how long should client identification documents be held for?</p>
<p>For at least five years after the cessation of the relationship with the client</p>
<p>True/False
| An engagement letter is only ever sent to a client before the first audit</p>
<p>False
It should be reissued if there is a change in circumstances</p>
<p>True/False
An engagement letter defines the scope of the engagement</p>
<p>True
This is one of the key elements of the engagement letter</p>
<p>Which three would ordinarily be contained in the overall audit strategy?
A. The contract between the audit firm and the client
B. The results of the audit risk assessment
C. Calculation of preliminary materiality
D. Detailed plan of audit procedures to be carried out
E. List of staff to be involved with the audit</p>
<p>B, C and E
The contract between the audit firm and client would be found in the engagement letter
The detailed plan of audit procedures to be carried out would be found in the audit plan</p>
<p>What are the performance ratios?</p>
<ol> <li>Return on capital employed</li> <li>Return on shareholder's funds</li> <li>Gross profit margin</li> <li>Cost of sales percentage</li> <li>Operating cost percentage</li> <li>Net margin (Operating margin)</li> </ol>
<p>What is return on capital employed?</p>
Profit before interest and tax/equity + net debt
What is return on shareholders’ funds?
Net profit for the period/share capital + reserves
What is gross profit margin?
Gross profit/Revenue
What is cost of sales percentage?
Cost of sales/Revenue
What is operating cost percentage?
Operating costs/Revenue
What is the net margin?
Profit before interest and tax/Revenue
What are the short-term liquidity ratios?
Current ratio and Quick ratio
