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 and Reactive. Proactive: the firm actively seeks out clients (e.g., through marketing). Reactive: the firm responds to clients who approach them (e.g., through inquiries or referrals).

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

Auditors must check if they can ethically and professionally act for the client. (e.g), ensuring there are no conflicts of interest or close personal relationships that could impair their independence.

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

Auditors must ensure they have the necessary skills, knowledge, and resources to perform the audit effectively.

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

Auditors must ensure their firm has sufficient staff, time, and expertise to effectively carry out the audit engagement.

Define the fourth consideration before accepting an engagement: Obtain references

Auditors gather information from external sources, such as previous auditors or banks, to assess the client's integrity and reputation.

Define the fifth consideration before accepting an engagement: Professional clearance

This is when the new auditor asks the previous auditor if there's any important reason they shouldn't take on the audit client.

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

Auditors must check if the company's managers are honest and trustworthy. If they're not, the financial information they give might be wrong.

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

1. Looking to list on stock exchange (Want firm to look good, may overlook some liabilities to increase worth)

2. Fraud history

3. Cash-only business

4. Already audited their past competitors

5. New management team

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

1. Talk to previous auditors

2. Prior financial statements 

3. Firm’s 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)

The 'MARROS' acronym helps remember these items:

1. Management's responsibilities for the financial statements.

2. Auditor's responsibilities and the scope of the audit.

3. Reporting framework used (e.g., IFRS, GAAP).

4. Report (audit report)

5. Objective of the audit.

6. Scope: applicable legislation and any specific legislations