[hayes, dassen, schilder and wallage, principles of auditing an introduction to isas, edition 2.1] ...

[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, 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 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.


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 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))


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 engagementThe 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.


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.


Slide 5.14

When using an expert’s work the auditor MUST :

Determine expert’s Competence (professional certifications)ExperienceReputation

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


Slide 5.15

Prior Auditor- First Time EngagementsIFAC 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)


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 teamo Fee proposal


Slide 5.17

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 5.18

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


Slide 5.19

Generally the Engagement Letter Should Include

The objective of the auditManagement responsibility for the financial

informationAn applicable financial reporting frameworkThe scope of the auditThe form of any reports or other resultsThe fact that some material misstatements may

remain undiscoveredUnrestricted access to all records,

documentation, and other information requested in connection with the audit


Slide 5.20

Thank You for Your Attention

Any Questions?

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