AUDTHEO: Preliminary Engagement Activities

This ==**cannot**== be a consideration of a CPA firm in deciding whether to accept a new client:

The client’s probability of achieving an unqualified opinion.

Auditors must not only decide whether to accept new clients; they also should periodically review their list of current clients and remove those clients the firm no longer wants to be associated with. Reasons for discontinuing clients might include the following:

* Difficulty in working with client personnel.
* Inability to negotiate an acceptable increase in the audit fee.
* Client need for specialized services the current firm is unable or unwilling to provide.

This is ==**not**== an acceptable reason for discontinuing clients:

Evidence indicating a client’s management has integrity

Management’s **integrity** affects all of the following risks:

1. Business risk
2. Audit risk
3. Financial Reporting risk

This factor __most likely__ would influence an auditor’s determination of the auditability of an entity’s financial statements

The adequacy of the accounting records

This auditor concerns __most likely__ could be so serious that the auditor concludes that a financial statement audit cannot be performed

There is a substantial risk of intentional misapplication of accounting principles

Prior to the acceptance of an audit engagement with a client who has terminated the services of the predecessor auditor, the CPA should:

Advise the client of the intention to contact the predecessor auditor and request a permission for the contact.

This factor __most likely__ would cause a CPA to ==**not**== accept a new audit engagement:

The prospective client is unwilling to make all financial records available to the CPA.

This factor __most likely__ would lead a CPA to conclude that a potential audit engagement should be rejected:

It is unlikely that sufficient appropriate evidence is available to support an opinion on the financial statements.

If the prospective client refuses to permit the predecessor to respond or limits the predecessor’s response, the successor should:

Inquire as to the reasons and consider the implications in deciding whether to accept the engagement

A firm has obtained information that would have caused it to decline an engagement had the information been available earlier. Actions available to the auditor would include the following:

* Reporting the information and its implications to the person/s who appointed the CPA
* Withdraw from the engagement
* Withdraw from the client relationship

According to PSA 210, the auditor and the client should agree on the terms of engagement. The agreed terms would need to be recorded in a(n)

Engagement Letter

An engagement letter is best described as ___

A letter from the auditors to company management that specifies the responsibilities of both the company and the auditors in completing the audit and the timing for its completion.

An engagement letter is prepared with the interest(s) of __________.

Both the client and the auditor

Engagement letters are widely used in practice for:

Professional engagements of all types

The primary purpose of the engagement letter is to:

Provide a written record of the agreement with the client as to the services to be provided

Engagement letter that documents and confirms the auditor’s acceptance of the engagement would normally be sent to the client. (When)

Before the commencement of the engagement

An auditor's engagement letter most likely would include a statement regarding:

Management's responsibility to provide certain written representations to the auditor.

An audit engagement letter __least likely__ include:

Identification of specific audit procedures that the auditor needs to undertake

The form and content of the audit engagement letters may vary for each client, but they would generally include reference to ==**except**==:

The scope of the audit, excluding reference to applicable legislation, regulations, or pronouncements of professional bodies to which the auditor adheres.

In making arrangements for an audit, there should be a clear understanding between the auditor and the client as to the following:

* Terms of settlement for audit services
* The type of audit to be performed
* Official to whom audit report shall be addressed

An auditor's engagement letter __most likely__ would include a statement that:

Limits the auditor's responsibility to detect errors and fraud.

On recurring audit engagements, the auditor may decide not to send a new engagement letter each period. In which of the following situations will there be ==**no need**== to send a new letter?

Recent change of middle management and rank and file organizational structure

A client’s insistence that the audited results are reported quickly after the fiscal year end is of concern to auditors because:

Time pressure created by unrealistic deadlines increases the risk of errors in judgment and in the performance of audit procedures.

If the auditor concludes that there is reasonable justification for the change in engagement, the report to be issued would

Be that appropriate for the revised terms of the engagement

If a change in the type of engagement from higher to lower of assurance is ==**not justified**==, the auditor should:

Refuse to agree to management’s request on the change of engagement and continue with the original engagement.

This helps prevent misunderstandings during audit planning

A preliminary meeting conference with the client to discuss fees, timing, client assistance and related issues.

One of the first things that the auditor will do after accepting a new client is:

Tour the client’s facilities.