Q&A Chapter 2 - Accepting and managing engagements Flashcards
LEARN Generic
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Why do we review work?
How to review?
- duty of care is owed to third party
- audit is a regulated activity
- confirm work is inline with engagement letter
- confirm all areas of judgement have been highlighted
How
- check calculations
- review specific pieces early ion
- sufficient evidence
- provide feedback
- q&a
internal audit?
What would you look at?
OBJECTIVITY: management acting on reccomendations, lack of constraints
TECHNICAL COMPETANCE: they new? qualified? training? supervision
DUE PROFESSIONAL CARE: check manuals, programmes, procedures, results, controls, reviews?
What are you looking for?
- anything unusual disclosed?
- are their conclusions approprate
REVIEW - engagement letter?
reduce expectations gap
- scope of work
- responsibilities of you
- responsibilities of them
- ‘forecast’ caveat
- limitatations of liability (limit distribution of forecast, written permission only, liability cap sets max amount of damages, include a caveat)
- aggree nature of audit
- intended use of report
- reduce exposure to damages (limit liability)
LEARN: Cold reviews vs hot review
COLD REVIEW
- inspect sample of engagements
- takes place after engagement has been completed
- needs to be by qualified person
- ensures firm’s compliance
- when deficiencies are identified: changes made, training, communication, disciplinary action
HOT REVIEW
- only for audits of listed clients, for high risk audits
- objective and independent evaluation of the significant judges the team has made
- takes place on or before date of audit report
- not a review of all working papers
Audit senior - keeping track of staff:
a) before audit
b) during audit
a) assess juniors skills, brief, train, explain timings, q&a, introduce to client
b) review pieces of work, check understanding of instructions,provide feedback, address matters arising
LEARN Audit vs. assurance (review engagement)
Audit versus assurance
Audit,
- subst. procedures / positive reasonable
- control tests
e.g. bank - bank confirmation letter, evidence of payments, bank rec
Assurance:
- analytical procedures / limited negative
- enquiry of management (less evidence)
e. g. bank - inquiry, ask about transfers, less evidence, asks if anything unusual
What are substantive procedures
tests by auditor in order to detect material misstatements
Lowballing
- legal
- threat to pro comp and due care
- do you have enough resources
- tricky to stay in budget
- if aim is to get non audit services, then objectivity may be impared = self review threat
When would you want to change an engagement letter / remind a firm of the engagement letter?
- signs that they are not aware
- change in ownership/management
- change in nature
- change in size of business
- legal or regulatory requirements
- financial reporting framework
- change in audit team
Engagement quality control review - what is it and who does it?
- pharmaceutical companies for example
would choose an expert, experience with listed companies, independent, qualified, not connected to pharma
Assess integrity of client
How?
What does this show?
Why?
State action, and justification (e.g. discuss with directors to assess attitude)
- previous auditor and audit reports
- 3rd party references
- research, relevant databases, press cuttings
- discussions with director
What?
- weak controls
- criminal/mlo/fraud
- unreliable management
- poor interpretation of standards
WHY?
- reputation
- investigation cost
Effects of bad press on accepting auditors
- engagement risk (misstatement = integrity?)
- reputation risk
- indicate integrity
- fraud or money laundering
- unreliable management represtnations
CASH
A. Handling of cash: internal controls?
B. How to test controls for cash stuff: external controls?
C. If you spot something dodgy?
A internal controls - bank rec - independent rec -segregation of duties- dual handling (opening versus recording) - should be prompt banking - keep cash secure (charity - mail)
B
- observation
- comparisons of dates
- analytical procedures
- bank rec inspection
C
Handling of cash = higher risk of money laundering (See MLRO)
Why engagement letter?
book?
- required by law
- sets out scope and requirement, holds individuals accountable
- management responsibilities versus auditors responsibilities
- relevent contact people
- limit liability - good for egal
- expectations gap
