AUD 2 - Terms of Engagement

Question 1

What is the responsibility of audit committees (audit committee of the client’s board of directors)

Answer 1

• Responsible for the selection and appointment of an independent external auditor
• Required for issuers

Question 2

Define integrity of client management?

Answer 2

The audit firm should minimize the likelihood of association with a client whose management lacks integrity

Question 3

Should an auditor accept an engagement is there is scope limitation (the ability to obtain sufficient appropriate evidence)?

Answer 3

• Auditor should NOT accept an engagement if prior to engagement - Management imposes a MAJOR scope limitation (e.g. lack of records)
• Auditor may still accept engagement if the scope limitation will result in a qualified opinion.

Question 4

What are the required contents of the engagement letter?

Answer 4

The engagement letter should include the required:

1) The objective and scope of the audit
2) The responsibilities of the auditor
3) The responsibilities of management (financial statements and internal control)
4) Statement that because of inherent risks/limitations, an unavoidable risk exists that some material misstatements may not be detected, even though the audit is properly planned and performed
5) Identification of the applicable financial reporting framework

Question 5

What are the three types of fraud?

Answer 5

1) Financial statement fraud (lying)
2) Asset misappropriation (stealing)
3) Corruption (cheating)

Question 6

What would cause the revision of the terms of the engagement for recurring audits?

Answer 6

1) Any indication that management misunderstands the objective or scope of the audit
2) Change in senior management
3) Change in size of entity
4) Change in framework

Question 7

What is mandatory for the engagement of an initial audit?

Answer 7

• Communication with the predecessor auditor is MANDATORY
  1) If a client is UNWILLING to let you speak with the previous auditor, consider withdrawing
  2) If client gives permission to speak with previous auditor, ask the old auditor about:
• Management’s integrity
• Disagreements with management
• Reason for change
• Fraud or noncompliance
• Review prior CPA’s workpapers

Question 8

Describe how a change in engagement (from audit to review or compilation) affects the engagement?

Answer 8

• Change must be justified

(E.g. if you find suspicious activity while conducting an audit, then the client says let’s do a compilation - consider withdrawing)