Syllabus Area B Flashcards
What are the contents of an engagement letter?
1) Terms with management will be written down that include:
• The objective and scope of the audit
• responsibilities of auditor and management
• framework
• form of report that will be issued
-professional standards, regulations and legislation that are applicable
-Limitations of audit
-Fee calculation basis
-Expectation of written representations from management
-Agreement of management to:
>notify the auditor of subsequent events
>provide draft financial statements on time
Any arrangements with internal auditors or staff
-any obligation to give audit working papers to other parties
Letter shud be signed by a director before starting audit work
What is the purpose of an engagement letter
to minimise any risk of misunderstanding with client
To Confirm acceptance of the engagement
To Set out the terms and conditions for both parties
It specifies the nature of the contract
The letter is sent before audit commences
Changes to the engagement letter
-review yearly to ensure up to date
-no need to re issue every year unless change in terms of agreement or there is a need to remind the entity of the existing terms.
Potential reasons for change:
• Changes in law
• Changes in professional duties, for example, due to new or updated ISAs
• Changes in services being provided
What matters should be considered before accepting an audit client?
1- integrity of management. check reputation of directors.
there should be a screening process. Investigate if they are involved in any bad practices. Don’t accept risky client otherwise firm’s reputation is at stake.
2- Pre condition for audit are present
3- deadline, is it realistic or not
4- competence - do u have industry specialisation, resources, skills?
5- ethical issues- is there anything that threatens compliance with acca code of ethics, name types of threats, if there r any issues consider their significance
6- Fees is it adequate?
7- corresponds with outgoing auditor. Ask if there are any reasons they shud not accept. Sister to sister.
To correspond auditor must obtain permission from client. Professional behaviour. If permission not granted then reject client.
What are the preconditions of audit?
Before accepting a new engagement auditor must establish if these preconditions are present:
Management acknowledges and understands its responsibility for:
1) preparation and presentation of the financial statements in accordance with applicable financial reporting framework
2) The management is responsible to implement internal control system for the FS to give a true and fair view
3) and for providing the auditor with access to all relevant information and explanations.
What quality control procedures should be carried out to ensure audit is planned effectively?
-The audit team should be properly briefed, On the client, To ensure they have a good understanding before they start work.
-Adequate supervision should be given, To the audit juniors, To ensure they have someone more senior they can refer to in case of any queries.
-Tracking should be done, Of the progress of the audit, To ensure the tight reporting deadline can be met.
-Assign more audit staff, To the team, to ensure work is not rushed
-Review, Of work should be performed more frequently, To identify issues promptly so they can be raised with the client and resolved quickly.
-An engagement quality control reviewer may be assigned
How can auditor assess if preconditions of audit are present or not
Check whether the reporting framework is acceptable , assess nature of entity and see if there is any law that prescribes a particular framework
Also get agreement from management that they agree to the responsibility of the 3 preconditions
If not then discuss with them,
Unless required by law, dont accept audit if they dont accept the preconditions,or financial reporting framework used by management is unacceptable
