W5 Obtaining, Accepting and Continuing Audit Engagements

Question 1

What are the issues to consider prior to accepting an audit engagement

Answer 1

Independence and objectivity

Management integrity

Money laundering

Resources

Risks

Fees

Professional competence

Client reputation

Preconditions for an audit

Professional clearance

Question 2

Independence and objectivity

Answer 2

If the firm is aware that the threats to objectivity cannot be managed prior to accepting an engagement, the engagement should NOT be accepted

Question 3

Management Integrity

Answer 3

If the firm has reason to believe the client lacks integrity, there is a greater risk of fraud and intimidation

Question 4

Money laundering

Answer 4

The firm must comply with money laundering regulations which require client due diligence to be carried out

If there is suspicion of money laundering being carried out by the prospective client, the firm cannot accept the engagement

Question 5

Resources

Answer 5

The firm should consider whether there are adequate resources available at the time of the engagement is likely to take place to perform the work properly

Question 6

Risks

Answer 6

Firms carry out risk analysis before accepting engagement considering;

• The company has a good financial record, resources and outlook
• The company appears to have good internal control
• The company has unusual transactions

*even if high risk, they may still ccept the engaagement

Question 7

Fees

Answer 7

Firms should consider the acceptability of the fee

Also, the creditworthiness of the prospective client should be considered (non-payment of fees creates a self-interest threat)

Question 8

Professional Competence

Answer 8

An engagement should only be accepted if the audit firm has the necessary skill and experience to perform the work competently

Question 9

Client reputation

Answer 9

The firm should consider the client’s reputation and whether association with the client could damage the firm’s reputation

Question 10

Preconditions for an audit

Answer 10

Before accepting or continuing an engagement, a firm must establish whether the preconditions for an audit are present

Management understands their responsibilities for:

• preparing the financial statements in accordance with the applicable financial reporting framework
• internal control necessary for the financial statements to give a true and fair view
• providing the auditor with access to all relevant information and explanations

Question 11

Professional clearance

Answer 11

The prospective auditor must ask the client for permission to contact the existing auditor (and refuse the engagement if the client refuses)

The existing auditor must ask the client for permission to respond to the prospective auditor. If the client refuses, the existing auditor should notify the prospective auditor of this. This should be considered when deciding to accept the engagement.

The prospective auditor should contact exiting auditors, asking for all relevant info to the decision whether to accept the engagement:
- Unpaid fees
- differences of opinion between auditor and client
-unlawful acts by the client

Question 12

What is an audit engagement letter

Answer 12

Agrees with the terms with the client

For recurring audits, not necessary to issue new letter each year but needs to be considered if it should be updated

Question 13

What are the contents of an audit engagement letter

Answer 13

• The objective and scope of the audit of the financial statements
• The responsibilities of the auditor
• The responsibilities of management

Identification of the applicable financial reporting framework for the preparation of the financial statements

The content of the audit engagement letter should be agreed with the client before any engagement work commences