AUDIT AND ASSURANCE

PRE-ACCEPTANCE

New engagements are obtained through:

ADVERTISING CLIENT REQUESTS TENDERING

Advertising:

Follow Legal Jurisdictions rules and regulations.

Lowballing: Firm charges low fees in order to attract new clients and undercut competition.
This can lead to Self Interest Threat as the audit firm will be cutting corners
due to low fees and might not use skilled people or spend adequate time in the
audit impairing the audit quality.

LOWBALLING IS NOT ETHICALLY PROHIBITED.

However, the Audit firm should be in a position to demonstrate the audit
quality by maintaining adequate documentations about the said audit

Tendering

The firm will put together a tender proposal in which the firm tries to sell their services to the
client to win the work and based on the proposals the client will decide on which firm to
choose.

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ISA 210: MATTERS TO BE CONSIDERED BEFORE ACCEPTING AN ENGAGEMENT:

PROFESSIONAL CLEARANCE

If offered an audit role, the prospective auditor should:

1. Obtain permission from the client to contact the existing auditor asking for all
information relevant to this decision on whether or not to accept the appointment
2. The client may choose to give permission or not. If permission is not given, the
auditors might reject the offer as it seems very risky, and the client wants to hide
certain things, which questions their integrity.
3. If permission is received, the auditor contacts the outgoing audit firm seeking any
reasons for not continuing in this audit.
4. The outgoing auditors again must ask the client for permission before responding to
the new auditors.

INDEPENDENCE
Prior to acceptance of the audit engagement, if the auditor is aware that the ethical threats
cannot be reduced to an acceptable level by putting in the relevant safeguards then the
audit should not be accepted.

MANAGEMENT INTEGRITY
If the firm believes that the client lacks integrity, there exists a greater risk of fraud and
intimidation which will increase and the risk for the firm to perform the audit. The firm will
need to assess whether this risk is within the risk capacity of the firm.

MONEY LAUNDERING
The firm is required to carry out client due diligence to comply with money laundering
regulations.
If there any suspicion or actual money laundering is been committed, then the firm cannot
accept the engagement.

➢ Establish the identity of the entity and its business activity e.g. by obtaining a certificate
of incorporation

➢ If the client is an individual, obtain official documentation including a name and address,
e.g. by looking at photographic identification such as passports and driving licences

➢ Obtain evidence of the company’s registered address e.g. by obtaining headed letter
paper

➢ Establish the current list of principal shareholders and directors.

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RESOURCES
The firm should assess whether there are adequate resources – time, staff etc. to perform
the audit. If not, it will impact the quality of work being performed.

RISKS
Any risks identified with the prospective client will need to be assessed to evaluate whether
it will have an impact on the opinion to be made. The firm will also need to assess whether
it is within the risk capacity of the firm.

FEES
The firm should consider the acceptability of the fees. The firms should consider the risk
involved in performing the audit.

PROFESSIONAL COMPETENCE
An engagement should only be accepted if the firm has the necessary skill and experience
to perform the audit with due care.

REPUTATION OF CLIENT
The firm should consider the reputation of the client for example adverse media attention
and assess whether the engagement should be accepted or not.

PRE-CONDITIONS TO AUDIT
Auditors should accept an agreement only if the preconditions of the audit exist. The
international auditing standards (ISA) requires the auditors to:

 Determine whether the financial reporting framework used in the financial

statements is acceptable,
 Obtain agreement from the management that it acknowledges and
understands its responsibility for the following
 Preparing the financial statements in line with the financial
reporting framework,
 Internal controls to be free from material misstatements,
 Providing the auditor with access to information relevant for the
audit and access to staff.

If the preconditions do not exists then the auditor should discuss the matter with the
management and should not accept the engagement unless required to do so or by law or
regulations

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LETTER OF ENGAGEMENT

This is the biding contract between the auditor and client

Purpose –

o Minimize the risk of any misunderstanding between the auditor and the client
o Confirm the acceptance of the audit
o Establish the terms and conditions of the audit.

Not required to be reissued every year – but needs to be reviewed

Matters to be included in an audit engagement letter (ATLEAST 6)

– The objective and scope of the audit;

– The responsibilities of the auditor;

– The responsibilities of management;

– Identification of the financial reporting framework for the preparation of the financial
statements;

– Expected form and content of any reports to be issued;

– Elaboration of the scope of the audit with reference to legislation;

– The fact that some material misstatements may not be detected;

– Arrangements regarding the planning and performance of the audit, including the
composition of the audit team;

– Management responsibilities

– The basis on which fees are computed

– Arrangements concerning the involvement of internal auditors and other staff of the entity;

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WHEN TO REVISE LOE

– If entity misunderstands the objective and scope of the audit, as this misunderstanding
would need to be clarified.

– Any revised or special terms of the audit engagement, as these would require inclusion in
the engagement letter.

– A recent change of senior management or significant change in ownership.

– A significant change in nature or size of the entity’s business. The approach taken by the
auditor may need to change to reflect the change in the entity and this should be clarified in
the engagement letter.

– A change in legal or regulatory requirements. The engagement letter is a contract; hence

if legal or regulatory changes occur, then the contract could be out of date.

– A change in the financial reporting framework adopted in the preparation of the financial
statements. The engagement letter clarifies the role of auditors and those charged with
governance, it identifies the reporting framework of the financial statements and if this
changes, then the letter requires updating.

PAST QUESTION:
Which TWO of the following should be included in an audit engagement letter?

(1) Objective and scope of the audit

(2) Results of previous audits
(3) Management’s responsibilities
(4) Need to maintain professional skepticism

A. 1 and 2
B. 1 and 3
C. 2 and 4
D. 3 and 4

ISA 210 Agreeing the Terms of Audit Engagements requires auditors to agree the terms of
an engagement with those charged with governance and formalize these in an engagement
letter.

Required:
(a) Identify and explain TWO factors which would indicate that an engagement letter
for an existing audit client should be revised. (2 marks)

(b) List SIX matters which should be included within an audit engagement letter. (3
marks)

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ISA 220 :ELEMENTS OF QUALITY CONTROL (HEALME)

Audit Firms should establish a system of quality control

EQCR: Engagement Quality Control Reviewer.

 HUMAN RESOURCE
The engagement partner should ensure that the engagement team has the competences
and capabilities to perform the audit in accordance with ISA. The firm needs to ensure that
there are sufficient audit team members and an audit partner to perform the audit.

 ETHICAL CONSIDERATION
The firm should ensure that the code of ethics has been complied by the members within
the firm.

 ACCEPTANCE AND CONTINUANCE

Before accepting the audit engagement, the firm will need to consider compliance with the
ethical requirements, assess the integrity of management, ensure the engagement team
has the required competences.

 LEADERSHIP
The engagement partner takes the overall responsibility for the overall quality of the audit
and ensures the following;

 Compliance with the ethical requirements.

 Acceptance and continuance procedures have been carried out.
 Engagement team have the appropriate skills and competences.
 Reviews have been performed. (The Senior audit team members should review
the work not just once rather an ongoing regular review to enhance the quality of
the audit)
 Sufficient and appropriate audit evidence has been obtained to support the audit
opinion.
 Appropriate consultation on difficult matters (senior or external expert ) has been
undertaken.

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 MONITORING
The firm must ensure compliance with ISA and legal requirements, quality control
procedures have been implemented and are effective.
Cold reviews are carried out after the audit report is signed it is done to ensure the firms
quality control procedures are working effectively.
If any issues identified, the firm may decide in providing more training, update their policies
and procedures and where necessary, take disciplinary actions against individuals.
Hot review is carried out before the audit report is signed and it is carried out to ensure
appropriate audit report is issued. Hot reviews are carried out for listed entities, those of
unusual circumstances and high risk. It is conducted by the engagement quality control
reviewer who is also referred to as an independent review partner who will perform the
following;

 Discuss the significant matters with engagement partner.

 Review the financial statement and proposed audit report.
 Review selected documentation and working papers which include high levels of
judgment and risk.

 ENGAGEMENT PERFORMANCE
Engagement performance comprises of direction, supervision and review of the
engagement.

 Direction – it involves informing the team members their responsibility, the

nature of the business, the objectives of the work to be performed, risks involved,
problematic areas and the detailed approach to audit.
 Supervision – it includes tracking the progress of the audit to ensure the
timetables are met, considering the competences of the team members, addressing
significant matters and identifying matters for consultation internally and externally
 Review – it includes whether the work is performed as per ISA, appropriate
consultations has taken place, work performed supports the conclusion and
evidence gathered to support the conclusion.

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