[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
[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
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
[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.
[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.
[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.
[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
[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 315)
Existence of related parties. (ISA 550- Final Draft 2006)
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.
[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
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
[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
[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)
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 5.11
Group Auditor and Other Auditor
An outside specialist such as IT, environmental or tax specialist, may be needed to properly audit the client.
ISA 600 (ED 2005) applies when an auditor, acting as a group auditor, decides to use the work of a related auditor or unrelated auditor in the audit of group financial statements.
The group auditor is solely responsible for expressing an audit opinion on the group financial statements. (Some countries (US) allow divided responsibility, other’s don’t.(UK, Australia, Japan))
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 5.12
The Group Auditor should document the
following in the audit work papers:
The other auditor’s professional qualifications, independence, professional competence and resources
Significant risks of material misstatement that may arise from audit components and the group auditor’s response to such risks.
The basis for the group auditor’s conclusion to accept or continue the engagement
The results of the risk assessment performed at the group level, and a description of the audit procedures to be performed,
The group auditor’s communications with other auditors about the group auditor’s requirements.
The group auditor’s conclusion on uncorrected misstatements, and the effect of the other auditors’ reports or memorandums of work performed on the groupaudit opinion.
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 5.13
Expert
ISA 620 defines an expert as a person or
firm possessing special skill, knowledge
and experience in a particular field other
than accounting and auditing.
[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 :
Determine expert’s
Competence (professional certifications)
Experience
Reputation
Have client write instructions to the expert
scope of the expert’s work,
coverage of expert’s report
intended use of the expert’s work,
access of the expert to files and records
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 5.15
Prior Auditor- First Time Engagements
IFAC Code of Ethics requires the new auditor to 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 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)
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 5.16
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 team
o Fee proposal
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 5.17
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
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 5.18
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
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 5.19
Generally the Engagement Letter Should Include
The objective of the audit
Management responsibility for the financial
information
An applicable financial reporting framework
The scope of the audit
The form of any reports or other results
The fact that some material misstatements may
remain undiscovered
Unrestricted access to all records,
documentation, and other information requested
in connection with the audit
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 5.20
Thank You for Your Attention
Any Questions?