PRELIMINART ENGAGEMENT ACTIVITIES

Objective of this phase

The auditor shall make a decision whether or not to accept a new client or continue relationship with an existing one

In making a decision whether to accept or reject an engagement, the auditor’s firm consider the following:

1. Its competence

2. Its independence

3. Its ability to serve the client properly; and

4. The integrity of the prospective client’s management

Ways to investigate the integrity of the client’s management:

1. Reading published articles

2. Inquiry to appropriate parties (professional who had rendered services or in the process of rendering services to the entity, predecessor auditor, entity legal entities, entity’s underwriter)

The auditor can directly asked the predecessor auditor to investigate the entity’s integrity (T/F)

False (need of clients consent)

Successor Auditor:

1. Proposed Auditor - hindi pa tinatanggap ‘yong engegement, ine-evaluate pa lang ‘yong client

2. Incoming Auditor - 1st year of audit

3. Existing Auditor - 2nd year onwards of audit

Appropriate Response if the proposed auditor asked the client for their consent and they refused:

Reasonable Justification

• Yes -

• No -

• Yes - alternative procedures

• No - consider the impact of the denial of the client to their integrity

Matters to be discussed with the predecessor auditor

RID

• Reasons for the change in auditor

• Information that might bear on the Integrity of the management

• Disagreement between the predecessor auditor and management as to accounting principles, auditing procedures, etc

Things that must be documented when the auditor decided to accept the engagement:

• Procedures performed

• Information obtained

• Conclusion Reached

The objective of the auditor to accept or continue an audit engagement only when the basis upon which it is to be performed has been agreed, through:

1. Establishing whether the preconditions for an audit are present; and

2. Confirming that there is common understanding between the auditor and the management and, where appropriate, those charged with governance of the terms of the audit engagement

Preconditions of an audit

• The use by management of an acceptable financial reporting framework in the preparation of the financial statements and

• The agreement of management and, where appropriate, those charged with governance to the premise on which an audit is conducted (specific terms and bridging the expectation gap)

Content of Engagement Letter - may vary but would generally include reference to:

1. The objective and scope of the audit of the financial statements

2. The responsibilities of the audit

3. The responsibilities of the management

4. Identification of the applicable financial reporting framework for the preparation of the financial statements; and

5. Reference to the expected form and content of any reports to be issued by the auditor and a statement that there may be circumstances in which a report may differ from its expected form and content.

An audit engagement letter may make reference to, for example:

RAFORMS

• The presence of audit Risk (unavoidable risk because of inherent limitations of audit)

• Unrestricted Access to whatever records

• The financial reporting Framework used

• Objective of the audit

• The form of any Reports or other communication

• Management’s Responsibility

• Elaboration of the Scope of the audit

The auditor may also wish to include in the letter

FRAP Reports

• Basis in which Fees are computed and any billing arrangements

• Expectation of receiving Representation letter

• Acknowledgement of management of terms of agreement

• Arrangement regarding the Planning of the audit

• Description of any other letters or Reports

Engagement Letter is required for audit to be conducted (T/F)

False

When relevant, the following points could also be made:

• Arrangements concerning the involvement of other auditors and experts in some aspects of the audit

• Arrangements concerning the involvement of internal auditors and other staff of the entity

• Arrangements to be made with the previous auditor, if any, in the case of initial audit

• Any restriction of the auditor’s liability when such possibility exists

• A reference to any further agreements between the auditor and the entity

• Any obligations to provide audit working papers to other parties

When the auditor of a parent entity is also the auditor of its subsidiary, branch, or division (component), the factors that influence the decision whether to send a separate engagement letter to the component include the following:

CLOSI

• Who appoints the Component auditor (if same lang yung mag-a-appoint, it will be unnecessary)

• Legal requirements in relation to audit appointments

• Degree of Ownership by parent

• Whether a Separate auditor’s report is to be issued on the component; and

• Degree of Independence of the component’s management from the parent entity

The auditor may decide not to send a new engagement letter each period (T/F)

True

The following factors may make it appropriate to revise the terms of the engagement and/or send a new letter:

Significance of change in terms and management/party

• Any indication that the client misunderstands the objective and scope of the audit

• Any revised or special terms of the engagement

• A recent change of management, board of directors or ownership

• A significant change in ownership

• A significant change in nature or size of the client’s business

• A change in legal or regulatory requirements

• A change in financial reporting framework adopted in the preparation of the FS

• A change in other reporting requirements

Generally, the auditor may accept the change in terms of the audit engagement (T/F)

False (shall not agree to a change where there is no reasonable justification for doing so)

Auditor’s response if he accepts the changes in the terms of audit agreement

The auditor and management shall agree on and record the new terms of the engagement in an engagement letter or other suitable form of written agreement

Auditor’s response if he is unable to agree to a change of the terms of the audit engagement and is not permitted by management to continue the original audit engagement:

1. Withdraw from the audit engagement where possible under applicable law or regulation; and

2. Determine whether there is any obligation, either contractual or otherwise, to report the circumstances to other parties, such as those charged with governance, owners or regulators

An understanding of a client’s business and industry and knowledge about operations are essential for performing an adequate audit. For a new client, most of this information is obtained

from client’s premises

Ultimately, the decision about whether or not an auditor is independent must be made by:

Auditor

The primary purpose of establishing quality control policies and procedures for deciding whether to accept a new client is to

Minimize the likelihood of association with clients whose management lacks integrity.

Communication with a predecessor auditor is initiated by:

The successor auditor

Before accepting an engagement to audit a new client, a CPA is required to obtain

The prospective client’s consent to make inquiries of the previous auditor, if any

A __________ auditor is the person asked to replace an existing auditor

Proposed

The use of engagement letters is generally designed to prevent lawsuits by third parties against the auditors (T/F)

False

CPA firm Staff assistants are generally responsible for planning and coordinating audit engagements. (T/F)

False (CPA Staff Assistants = Junior Auditors - performance. Supervisory and/or managerial level or partner - coordinating)

The partner in charge of the engagement is primarily responsible for the performance of an audit (T/F)

True

The risk of material misstatement refers to the risk that the financial statements are materially misstated

prior to the audit engagement

The auditor's program for the examination of long-term debt should include steps that require the

Examination of any bond trust indenture