Week 3: Acceptance, Planning and Audit Risk

Question 1

Provide a breakdown of the audit process:

Answer 1

Engagement
Planning:
understanding the business and risk
assessment
audit strategy and plans
Interim audit:
compliance testing of internal controls
Final audit:
substantive testing of transactions and
disclosures
revision of materiality levels & review of errors
review of going concern narrative
review of management disclosures and other
completion procedures
review of subsequent events
Reporting:
unmodified or modified opinion

Question 2

Firms do not have to accept every client that requests one, why would firms not accept a client?

Answer 2

Controversial industry
Audit firm is not independent of the client
The audit firm may not have the required expertise to conduct the audit
Unlikely to pay audit fees
Any unlawful behaviour - e.g., money laundering

Question 3

In regards to the acceptance of a new client, what are some risks to the firm?

Answer 3

Would engaging with the firm be professional and ethical?
Would it be financially viable?
Would there be a reputation risk by engaging wit the client?

IFAC’s Code of Ethics for Professional Accountants states: ‘Before accepting a new client relationship, a professional accountant in public practice shall determine whether acceptance would create any threats to compliance with the fundamental principles.

Question 4

ISA 220 A 50 highlights some considerations for acceptance:

Answer 4

The integrity and ethical values of the principal owners, key management and those charged with governance of the entity;
Whether sufficient and appropriate resources are available to perform the engagement;
Whether management and those charged with governance have acknowledged their responsibilities in relation to the engagement;
Whether the engagement team has the competence and capabilities, including sufficient time, to perform the engagement; and
Whether significant matters that have arisen during the current or previous engagement have implications for continuing the engagement.

Question 5

Does it stop after acceptance?

Answer 5

Auditors must annually perform continuance procedures (similar to acceptance)

Question 6

What is the engagement letter?

Answer 6

Once the firm has agreed to accept an engagement, the terms will be documented in an engagement letter, which acts as a contract between the audit firm and the client.
ISA 210 highlights the elements of an engagement letter.
Letters do not need to be issued each year (ISA 210 indicates circumstances where it would be appropriate to issue a new letter)

Question 7

Non Audit Services (NAS) and Audit:

Answer 7

Clients may approach the auditor for additional non audit services, e.g., tax or book keeping etc.

The FRC has undertaken a major revision of its Ethical Standard, with the changes intended to strengthen auditor independence, prevent conflicts of interest and promote audit quality.

Revised FRC Ethical Standards bans auditors from providing recruitment and remuneration services. Auditors of PIEs will now only be able to provide NAS which are closely linked to the audit itself or are required by law or regulation