1 Topic# 1 – Engagement Acceptance Readings, pages 63-77 Procedures to be followed in accepting a new client: A.Communication with predecessor auditor.

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Presentation transcript:

1 Topic# 1 – Engagement Acceptance Readings, pages Procedures to be followed in accepting a new client: A.Communication with predecessor auditor B.Client Screening C.Letter or Engagement Change in Engagement issues

2 The procedures include the following: Before accepting nomination, the auditor/s should: Ensure that there are no independence or other ethical problems that are likely to cause conflict. Ensure that they are professionally qualified (which they should be!) Obtain a preliminary knowledge of the industry and of the ownership, management and operations of the entity, and consider whether he or she will be able to obtain an adequate level of knowledge to perform the audit. Ensure that hey have adequate existing resources (i.e. staff, time & technical expertise) Communicate with the predecessor auditor (discussed at A below). Perform client screening (discussed at B below) Present a proposal to the prospective client outlining: Information about the firm, information about the firm’s proposed services and information about the fees that the firm will charge.

3 The procedures include the following: After accepting nomination, the auditor/s should: Ensure that the out going auditor's removal or resignation has been properly conducted Ensure that their own appointment is valid by obtaining a copy of the resolution passed at the annual general meeting Submit a letter of engagement (discussed at C below)

4 A. Communication with the Predecessor Auditor Approach: –Seek permission from client –Client will be asked to authorize the predecessor to respond fully to all inquiries Types of Inquiries: –Integrity of management –Disagreement with management on accounting principles, auditing procedures etc. –Predecessor’s understanding as to reasons for change –Any professional reasons why the new auditor should not accept the engagement

5 B. Client Screening – formal term for assessing a client Includes the following issues: –Management Integrity –Risk ( reputation to audit firm’s name ) –Engagement economics ( the engagement should be financially worthwhile ) Some clients e.g. Financial services companies, cash intensive companies, builders & contractors need more intense investigations (due diligence).

6 C. Letter of Engagement (a.k.a. Engagement Letter) e.g on page 67 Objectives: –Document the contractual duties agreed to by the auditor and the client. –Explain the auditor's and client's responsibilities. It should explain in non -technical language the nature of the services to be rendered and establish that the financial statements are the client's responsibility. –Protect the auditor from legal liability. –Provide audit staff with an understanding of the nature of the engagement.

7 Change in Engagement Both auditor and client must agree. The reason for change must be justified. If auditor does not agree to the change and is prevented from continuing the original engagement, he should withdraw.

8 The end