Preliminary Engagement Activities

Agreeing in the terms of Audit Engagements (PSA 210)

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

The objective of Preliminary Engagement Activities

Self-Evaluation of:

1. Its competence

2. Its independence

3. Its ability to serve the client properly

4. The integrity of the prospective client’s management and its auditability

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

Proposed Auditor upon consent of client

In communication with the predecessor auditor, who shall initiate the communication?

If it is reasonable - perform alternative procedures

if it is unreasonable - beware of redflags

For instance that the client did not gave consent to communicate with predecessor auditor, the auditor should evaluate the reasonable justification of the refusal.

1. Reasons for change of auditor

2. Information that might bear on the integrity of the management

3. Disagreements regarding application of accounting policies and performance of audit procedures

Communications between the predecessor auditor would involve

1. Establishing whether the preconditions for an audit are present

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

Accept or Continue an audit engagement only when the basis upon which it is to be performed has been agreed thorugh:

1. The use by management of an acceptable financial reporting framework in the preparation of the FS

2. The agreement of management and, where appropriate, those charged with governanmce to the premise on which an audit is conducted

Preconditions of an audti

Audit Engagement Letter or other suitable form of written agreement. Hence, a preparation of Audit Engagement Letter is not required as it may be called another term.

The agreed terms of the audit engagement shall be recorded in?

May vary for each client but would generally include reference to:

1. Objective and scope of the audit of the FS

2. Responsibilites of auditor

3. Responsibilities of management

4. Identification of applicable financial reporting framework for the preparation of the FS

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

Form and content of Audit Engagement Letter includes

RAFORMS

1. The presence of audit Risk

2. Unrestricted Access to whatever records

3. The financial reporting Framework used

4. Obejctive of the audit

5. The form of any Reports or other communication

6. Management’s responsibility

7. Elaboration of the Scope of the audit

An audit engagement letter may make reference to

CLOSI

1. Who appoints the Component auditor

2. Legal requirements in relation to auidt appointments

3. Degree of Ownership by parent

4. Whether a Separate auditor’s report is to be issued on the component

5. Degree of Independence of the component’s management from the parent entity

In an audit of component, there is a need to send an additional engagement letter to the component when?

1. Any indication that the client misunderstands the objective and scope of the audit

2. Any revised or special terms of the engagement

3. A recent change of management, BoD, or Ownership

4. A significant change in Ownership

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

6. A change in legal or regulatory requirements

7. A change in financial reporting framework adopted in the preparation of FS

8. A change in other reporting requirements

The auditor may decide not to send a new engagement letter each period for recurring audits except when?

1. Change in circumstances affecting the need for the service

2. A misunderstanding as to the nature of an audit or related services originally requested

Change in the engagement is reasonable when?

1. A restriction on the scope of the engagement, whether imposed by management or caused by circumstances

2. If the change relates to information that is incorrect, incomplete, or otherwise unsatisfactory

3. The auditor is unable to obtain sufficient appropriate audit evidence regarding assertions

Change in the engagement is unreasonable when?

1. 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.

2. Avoid referring to the orignial engagement and procedures performed therein except when the new engagement is agreed-upon procedures

Auditor’s response on agreement of a change in engagement

1. Continue the original engagement

2. When prohibited from doing (1):

   1. Withdraw from the engagement

   2. Determine if there are any obligations to report to other parties

Auditor’s response when he is unable to agree to a change in engagement