Ch05

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007

Slide 5.1

Client Acceptance Principles of Auditing: An Introduction to

International Standards on Auditing - Ch. 5

Rick Stephan Hayes, Roger Dassen, Arnold Schilder,

Philip Wallage


Slide 5.2

Client Acceptance Phase Objectives

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


Slide 5.3

Client Acceptance Procedures

Evaluate the clients background and reasons for the audit.

Determine whether the auditor is able to meet the ethical requirements regarding the client

Determine need for other professionals. Communicate with predecessor auditor. Prepare client proposal. Select staff to perform the audit. Obtain an engagement letter.


Slide 5.4

Knowledge of a Client’s Business Helps Auditors

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.


Slide 5.5

preliminary examination of clients

• 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.


Slide 5.6

Sources of Information for Client Evaluation

Illustration 5.2


Slide 5.7

Evaluate governance, internal controls and possible risks with client's management and staff including

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.


Slide 5.8

New Client Review

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


Slide 5.9

Illustration 5.3


Slide 5.10

Ability to Meet Audit Team Ethics and Competence

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)


Slide 5.11

Group Engagement Partner, Specialist, Component Auditor

An outside specialist such as IT, environmental or tax specialist, may be needed to properly audit the client.

ISA 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. (Some countries (US) allow divided responsibility, other’s don’t.(UK, Australia, Japan))


Slide 5.12


Slide 5.13

Auditor’s Expert• ISA 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.


Slide 5.14

When using an expert’s work the auditor MUST :

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


Slide 5.15

Reference to the Auditor’s Expert in the Auditor’s Report

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.


Slide 5.16

Prior Auditor- First Time EngagementsIFAC 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. (ISA 510)


Slide 5.17

Continuing Client Audit Proposal

o A review on how the auditing firm can add value

o Plans for further improvement in value added

o A description of the audit teamo Fee proposal


Slide 5.18

New Client Audit ProposalAn executive summaryClient’s business and audit expectationsStrengths of the audit firm Audit team Audit approachClient’s internal auditorsTransition needsOther services of the audit firmAfter service monitoringFee details


Slide 5.19

professional fees should be a fair reflection of

$ 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


Slide 5.20

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


Slide 5.21

Generally the Engagement Letter Should Also Include

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.


Slide 5.22

Thank You for Your Attention

Any Questions?

Ch05

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