8 - Preplanning Activities - Client Acceptance.ppt [Comp

FAKULTAS EKONOMI DAN BISNIS UNIVERSITAS INDONESIA

Client Acceptance

Aud Au d i t Pr Pro o c es ess s Mo Mod d el Phase I: I: Client Acceptanc e Objective:

Determine both acceptance of a client and acceptance by a client. Decide on acquiring a new client or continuation of relationship with an existing one and the type and amount of staff required.

Procedures:

(1) Evaluate the client’s background and reasons for the audit (2) Determine whether the auditor is able to meet the ethical requirements regarding the client (3) Determine need for other professionals (4) Communicate with predecessor auditor (5) Prepare client proposal (6) Select staff to perform the audit (7) Obtain an engagement letter

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Aud Au d i t Pr Pro o c es ess s Mo Mod d el Phase II: II: Planni ng Objective:

Determine the amount and type of evidence and review required to give the auditor assurance that there is no material misstatement of the financial statements.

Procedures:

(1) Perform audit procedures to understand the entity and its environment, including the entity’s internal controls (2) Assess the risks of material misstatements of the financial statements (3) Determine materiality; and (4) Prepare the planning memorandum and audit program, containing the auditor’s response to the identified risks

Aud Au d i t Pr Pro o c es ess s Mo Mod d el Phase III: III: Testing Testing and Evidenc e Objective:

Test for evidence supporting internal controls and the fairness of the financial statements.

Procedures:

(1) Tests of controls (2) Substantive tests of transactions (3) Analytical procedures (4) Tests Tests of details of balances (5) Search for unrecorded liabilities

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Audit Process Model Phase IV: Evaluation and Reportin g Objective:

Complete the audit procedures and issue an opinion.

Procedures:

(1) Evaluate governance evidence (2) Perform procedures to identify subsequent events (3) Review financial statements and other report material (4) Perform wrap-up procedures (5) Prepare Matters for Attention of Partners (6) Report to the board of directors (7) Prepare Audit report

Learnin g Objectives

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After studying this chapter, you should be able to: 1. Explain what is meant by client acceptance. 2. Describe the seven primary procedures involved in the client acceptance process. 3. Understand the main reasons for obtaining an understanding of client’s business and industry. 4. Know the sources of client information and the methods for gathering the information. 5. Discuss the ethical and competency requirements of the audit team. 6. Know what is required in using the work of another auditor.

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Learnin g Objectives

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After studying this chapter, you should be able to: 7. Understand the auditor’s responsibility in using the work of an expert. 8. Describe the procedures for communicating with an existing (predecessor) auditor. 9. Know the contents of a client audit engagement proposal. 10. Express the differences between items covered in an audit engagement proposal to existing clients and one for new clients. 11. Explain on what basis audit fees are negotiated. 12. Understand what an audit engagement letter includes and why its contents are important.


LO 1: Explain what is meant by client acceptance.

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Client acceptance phase objecti ves

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• Examination of the proposed client to determine if there is any reason to reject the engagement (acceptance OF the client) and convincing the client to hire the auditor (acceptance BY the client) • Decide on acquiring a new client or continuation of the relationship with and existing client • Determine the type and amount of staff


LO 2: Describe the seven primary procedures involved in the client acceptance process.

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Client acceptance pr ocedures

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1. Evaluate the clients background and reasons for the audit. 2. Determine whether the auditor is able to meet the ethical requirements regarding the client 3. Determine need for other professionals. 4. Communicate with predecessor auditor. 5. Prepare client proposal. 6. Select staff to perform the audit. 7. Obtain an engagement letter.


LO 3: Understand the main reasons for obtaining an understanding of client’s business and industry.

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Knowledge of a client’s bu siness helps auditors

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• to evaluate the engagement risks associated with accepting the specific engagement and • to help the auditor in determining whether all professional and ethical requirements (including independence, competence, etc.) regarding this client can be met.

Prelimi nary examination of cli ents

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• New and existing clients – visiting their premises, – reviewing annual reports, – having discussions with client's management and staff – accessing public news and public information databases, usually via the Internet.

• For an existing one, prior years' working papers should be reviewed. • For a new client, consult prior auditors and increase preliminary information search.

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LO 4: Know the sources of client information and the methods for gathering the information.

Sources of inf ormation for client evaluation

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Evaluate governance, internal controls and possibl e risks with cl ient's management and staff including

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 Changes in management, organizational structure, and activities of the client.  Current government regulations  Current business developments  Current or impending financial difficulties or accounting problems.  Susceptibility of the entity’s financial statements to material misstatement due to error or fraud.(ISA 240 & ISA 315)  Existence of related parties. (ISA 550)  New or closed premises and plant facilities.  Recent or impending changes in technology, types of products or services and production or distribution methods.  Changes in the accounting system and the system of internal control.

New client review

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publicly available information, past company financial statements, reports to stockholders, government financial reports (e.g., U.S. SEC 10K report) company premises via tour previous auditor relationship

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LO 5: Discuss the ethical and competency requirements of the audit team.

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Ability to meet audit team ethics and competence

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Independence of auditor (personal investments, client business relationships, non-audit services, unpaid fees) Litigation Technical training and proficiency required in the circumstances Partner rotation (SOx 5yrs, EU 7yrs, PP 20/2015 5 yrs)

Specific co mpetencies

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On the basis of the specific circumstances of the client and its industry, the auditor should determine if the necessary expertise regarding the industry, specific GAAP issues, or certain non-audit skills are available to the audit team. Review existing partner and staff competencies:

– knowledge of relevant industries or subject matters; – experience with relevant regulatory or reporting requirements; – ability to complete the engagement within the reporting deadline.

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LO 6: Know what is required in using the work of another auditor.

Group engagement partner, specialist, component auditor

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• An outside specialist such as IT, environmental or tax specialist, may be needed to properly audit the client. • SA 600 applies when an auditor, acting as a group engagement partner , decides to use the work of a component auditor in the audit of group financial statements. • Component auditor – An auditor who, at the request of the group engagement team, performs work on financial information related to a component for the group audit.

• The group audit partner is solely responsible for the direction, supervision and performance of the group audit engagement and whether the auditor’s report that is issued is appropriate in the circumstances.

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LO 7: Understand the auditor’s responsibility in using the work of an expert.

Auditor’s expert

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• SA 620 defines an Auditor’s expert as an individual or organization possessing expertise in a field other than accounting or auditing, whose work in that field is used by the auditor to assist the auditor in obtaining sufficient appropriate audit evidence.

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When usin g an expert’s work, the auditor MUST :

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• Determine expert’s • Competence (professional certifications) • Capabilities • Objectivity

• The auditor shall agree, in writing when appropriate, with the auditor’s expert: • The nature, scope and objectives of that expert’s work • The respective roles and responsibilities of the auditor and that expert • The nature, timing and extent of communication • The need for the auditor’s expert to observe confidentiality.

Reference to t he auditor ’s expert in the auditor’s report

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• The auditor shall not refer to the work of an auditor’s expert in an auditor’s report containing an unmodified (unqualified) opinion unless required by law or regulation to do so. • If the auditor makes reference to the work of an auditor’s expert in the auditor’s report because such reference is relevant to an understanding of a modification to the auditor’s opinion, the auditor shall indicate in the auditor’s report that such reference does not reduce the auditor’s responsibility for that opinion.

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LO 8: Describe the procedures for communicating with an existing (predecessor) auditor.

Prior auditor- first time engagements

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• IESBA Code of Ethics recommends that the new auditor communicate directly with the previous auditor. • The proposed accountant should request permission from the client to communicate with existing accountant. • When the prior accountant receives the communication, he should ordinarily reply advising of any reasons why the proposed accountant should not accept the appointment. • First time engagements require evidence that opening balances are not misstated, prior balances are correctly brought forward, and proper accounting applied. (SA 510)

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LO 9: Know the contents of a client audit engagement proposal.

LO 10: Express the differences between items covered in an audit engagement proposal to existing clients and one for new clients.

Continuin g client audit prop osal

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• A review on how the auditing firm can add value • Plans for further improvement in value added • A description of the audit team • Fee proposal

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New client audit proposal

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• An executive summary • Client’s business and audit expectations • Strengths of the audit firm • Audit team • Audit approach • Client’s internal auditors • Transition needs • Other services of the audit firm • After service monitoring • Fee details • Appendix


LO 11: Explain on what basis audit fees are negotiated.

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profession al fees should be a fair reflection o f

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• the skill and knowledge required for the type of professional services involved • the level of training and experience of the persons performing the services • the time necessarily to perform services; • the degree of responsibility that performing those services entails. • No contingency fees

Commissio ns and r eferral fees

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• If proper safeguards are in place • An auditor may receive a referral fee or commission. • For example, when she does not provide the specific service required, a fee may be received for referring a client to another accountant or other expert.

• A auditor may also pay a referral fee to obtain a client • for example, where the client requires specialist services not offered by the existing auditor.

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LO 12: Understand what an audit engagement letter includes and why its contents are important.

Content of engagement letter

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The agreed terms of the audit engagement shall be recorded in an audit engagement letter or other suitable form of written agreement and shall include: (a) The objective and scope of the audit; (b) The responsibilities of the auditor; (c) The responsibilities of management; (d) Identification of the applicable financial reporting framework; and (e) 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

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Generally the engagement letter should also include

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Access to all information of which management is aware that is relevant to the preparation of the financial statements such as records, documentation and other matters; Additional information that the auditor may request from management for the purpose of the audit; and Unrestricted access to persons within the entity from whom the auditor determines it necessary to obtain audit evidence.


Recap of this session

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Recap • In accepting/evaluating, considers engagement risks; ethical requirements and competence. • Auditor need to consider the involvement of specialist/expert and/or other professionals (i.e. component auditor, predecessor/prior auditor). • Engagement letter (or other written agreement) is prepared to document the terms of engagement.


Further readings

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Selected materials

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Hayes, Wallage, and Gortemaker, “Ch. 5, Client Acceptance” in Principles of Auditing – an Introduction to International Standards on Auditing, 3rd Edition , 2014

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8 - Preplanning Activities - Client Acceptance.ppt [Comp

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