1. [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, Philip Wallage, and Hans Gortemaker

2. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 5.2 Client Acceptance Phase Objectives ìExamination 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) ìDecide on acquiring a new client or continuation of the relationship with and existing client ìDetermine the type and amount of staff

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

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

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

6. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 5.6 Sources of Information for Client Evaluation Illustration 5.2

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

8. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 5.8 New Client Review 4publicly available information, 4past company financial statements, 4reports to stockholders, 4government financial reports (e.g., U.S. SEC 10K report) 4company premises via tour 4previous auditor relationship

9. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 5.9 Illustration 5.3

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

11. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 5.11 Specific Competencies  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;

12. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 5.12 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))

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

14. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 5.14 When using an expert’s work the auditor MUST : 4Determine expert’s 4Competence (professional certifications) 4 Capabilities 4 Objectivity 4The auditor shall agree, in writing when appropriate, with the auditor’s expert:  The nature, scope and objectives of that expert’s work 4The respective roles and responsibilities of the auditor and that expert 4The nature, timing and extent of communication 4The need for the auditor’s expert to observe confidentiality

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

16. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 5.16 Prior Auditor- First Time Engagements 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. (ISA 510)

17. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 5.17 Continuing Client Audit Proposal oA review on how the auditing firm can add value oPlans for further improvement in value added oA description of the audit team oFee proposal

18. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 5.18 New Client Audit Proposal  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

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

20. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 5.20 Commissions and Referral Fees  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.

21. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 5.21 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

22. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 5.22 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.

23. [Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007 Slide 5.23 Thank You for Your Attention Any Questions?