Assurance and Risk: Chapter 2 - Obtaining an engagement

These flashcards cover major concepts related to the process of assurance and engagement as outlined in the ICAEW ARF lecture notes.

State the 2 ways assurance firms obtain clients + Define

• Proactive: Firm actively seeks clients (marketing, tenders).

• Reactive: Client approaches the firm (enquiries, referrals).

What acceptance procedures are carried out BEFORE accepting a new client? (EPPCM)

• Ethical considerations

• Professional competence and resources

• Professional clearance

• Client risk

• Management integrity

Define the first consideration before accepting an engagement: Ensure ethically acceptable to act

Are there any conflicts of interest of threats to independence (e.g the auditor may’ve shares in the firm)

Define the second consideration before accepting an engagement: Ensure professionally qualified to act

Auditors must have the necessary skills, knowledge, and experience to perform the engagement competently.

Define the third consideration before accepting an engagement: Ensure existing resources adequate

Do auditors have enough time, staff and specialist expertise to carry out the engagement?

Define the fourth consideration before accepting an engagement: Obtain references

Auditors obtain information from external sources (e.g. banks or advisors) to assess the client’s reputation and integrity.

Define the fifth consideration before accepting an engagement: Professional clearance

Professional clearance involves asking the previous auditor whether there is any professional reason why the appointment should not be accepted.

Define the sixth consideration before accepting an engagement: Consider the integrity of those managing the company

Dishonest management increases the risk of unreliable financial information.

Give 5 factors that could indicate an audit client was high risk (LFCCM)

1. Looking to list on a stock exchange

2. History of fraud

3. Cash-based business

4. Conflicts of interest (e.g already audited their past competitors)

5. New or inexperienced management

Give 3 sources of information that could be sourced about a new client

1. Previous auditor

2. Prior financial statements

3. Public information (e.g. website)

What should an auditor do if the client does not grant permission to contact the old auditor?

Normally decline the appointment.

What is the purpose of an audit engagement letter?

To confirm the terms of the engagement and the responsibilities of both parties and close the expectation gap.

What are 2 factors that could indicate an audit client is low risk?

• Solid management record

• Consistent audit history.

State the 6 mandatory items in an audit engagement letter (MARROS)

• Management’s responsibilities - Management must prepare financial statements that are accurate and follow the accounting rules.

• Auditor’s responsibilities - The auditor must check the financial statements and give an opinion on whether they are free from major errors.

• Reporting framework - The accounting standards or rules used to prepare the financial statements.

• Report (form of audit report) - The official document where the auditor gives their opinion on the financial statements.

• Objective of the audit - To provide reasonable assurance that the financial statements are true and fair.

• Scope of the audit - The areas the auditor will examine and the laws or standards they must follow.

What acceptance procedures are carried out AFTER accepting a new client?

• Perform client due diligence (CDD)

• Issue engagement letter

What is client due diligence (CDD)?

Procedures performed to identify the client and assess money laundering risk before starting an engagement.

Give examples of documents checked as part of client due diligence (CDD)

• Passport or photo ID

• Proof of address

• Company registration documents

• Beneficial ownership information

What is continuance?

An annual review to decide whether the firm should continue acting for an existing client.

What factors are considered in continuance decisions?

• Management integrity

• Ethical issues

• Changes in risk

• Previous audit experience