1. Preliminary engagement activities
refer to PSA 300 undertaken to determine whether or not to accept the audit engagement!
Preliminary engagement activities: performed (1) to know if the auditor is qualified to handle the engagement and (2) to evaluate whether the financial statements are auditable or not in making this assessment, the auditor should consider the following: 1. his competence 2. his independence 3. his ability to serve the client 4. integrity of the prospective client’s management I. Auditor’s competence Code of Ethics mandates that the auditors should not portray themselves as having expertise which they do not possess. auditor should obtain a preliminary knowledge of the client’s business and industry to know if (1) he has the necessary skills and the competence to handle the engagement or (2) whether such competence can be obtained before the completion of the audit competence can be acquired through a combination of education, training, and expertise
II. Auditor’s independence Code of Ethics states that essential to the credibility of the auditor’s report is the concept of independence auditor should consider if there are any threats to the audit team’s independence and objectivity , and if so, whether adequate safeguards can be established
III. Auditor’s ability to serve the client properly (PSA 220) engagement should not be accepted if there are not enough qualified personnel to perform the audit audit work should be assigned to personnel who have the appropriate capabilities, competence, and time to perform the audit engagement in accordance with the professional standards there should be sufficient direction, supervision, and review of work at all levels to provide reasonable assurance that the firm’s standard of quality is maintained in the performance of the engagement
Once permission of the client is obtained, the incoming auditor should inquire into matters that may affect the decision to accept the engagement, which includes: 1. predecessor auditor’s understanding as to the reasons for the change of auditors 2. any disagreement between the predecessor auditor and the client 3. facts that might have bearing on the integrity of the prospective client’s management like fraud or noncompliance with laws and regulations Code of Ethics requires the predecessor auditor to respond fully to the incoming auditor’s inquiry and advise the incoming auditor if there are any professional reasons why the engagement should not be accepted. Retention of existing clients: Clients should be evaluated (1) at least once a year or (2) upon occurrence of major events such as changes in management, directors, ownership, nature of client’s business, or other changes that may affect the scope of the examination. In general: conditions which would have caused an accounting firm to reject a prospective client may also result or lead to a decision of terminating an audit engagement
Before performing any significant audit activities, PSA 300 requires the auditor to undertake the following preliminary engagement activities: - PEE 1. Performing procedures regarding the continuance of the client relationship and the specific audit engagement 2.
Evaluating compliance with ethical requirements, including independence
3.
Establishing an understanding of the terms of the engagement
Performing the preliminary engagement activities at the beginning of the current audit engagement assists the auditor in: - PI Planning the audit, and Identifying areas that may affect the auditor’s ability to perform the audit engagement adversely
Engagement letter: Engagement letter: written contract between the auditor and the client
Engagement letter should be prepared: after accepting the audit engagement
IV. Integrity of the prospective client’s management ( PSA 220) auditors should conduct a background investigation of the prospective client in order to minimize the likelihood of association with clients whose management lacks integrity
This task would involve: (1) Inquiring appropriate parties in the business community inquiring the prospective client’s banker, legal counsel, or underwriter to obtain information about the reputation of the prospective client
(2) Communicating with the predecessor auditor Communication with the predecessor auditor is not only a matter of courtesy to the predecessor auditor: it also allows the incoming auditor to obtain info. about the prospective client to determine whether to accept or reject the engagement
But before the incoming auditor can contact the predecessor auditor of the prospective client: incoming auditor should obtain prospective client’s permission to communicate with the predecessor auditor because the Code of Ethics prevents an auditor from disclosing any information obtained about the client without the client’s explicit permission
Refusal of the prospective client’s management to permit this: will raise serious questions as to whether or not the engagement will be accepted!
Engagement letter sets forth: - OMS-FFR 1. objective of the audit of financial statements which is to express an opinion on them 2. management’s responsibility for the fair presentation of the financial statements 3. scope of the audit 4. forms or any reports or other communication that the auditor expects to issue 5. fact that there is an unavoidable risk that material misstatements may remain undiscovered because of the limitations of the audit 6. responsibility of the client to allow the auditor to have unrestricted access to whatever records, information, or documentation requested in connection with the audit Engagement letter may also include: - BEAR 1. billing arrangements 2. expectations of receiving management letter 3. arrangements concerning the involvement of others (experts, other auditors, internal auditors) 4. request for the client to confirm the terms of the engagement
Importance of the engagement letter: to avoid misunderstanding with respect to the audit engagement, and to document and confirm the auditor’s acceptance of the appointment
