Week 8 - L2 Flashcards
Name 2 reasons why a firm may obtain a new engagement
get a new client
- Company meets the audit threshold
- Company wants to change audit firm
- Audit firms want to grow and need new clients
- Mandatory firm rotation if listed
What’s an audit threshold?
Financial criteria that determines whether or not a company is legally required to undergo a statutory.
Name 2 METHODS to obtain a new engagement
- Client responds to advertising
- Client contacts the firm
- Audit firm bids for the work
What’s the steps to obtaining a new client?
Before client acceptance
- Client Screening Process
After Client Acceptance
- An Engagement Letter
Work Complete.
Why do audit firms use the Screening Process?
It helps audit firms manage risk.
How many steps are there in the client screening process?
7 steps.
What’re the 7 steps of the client screening process?
- Audit preconditions
- Professional clearance
- Client’s reputation
- Practice expertise
- Professional ethics
- Management integrity
- Resources available and fees
What’re audit preconditions?
Conditions that must be met before the audit happens.
ISA 210 requires auditors to only accept a new audit if the preconditions for an audit are present.
Preconditions Not Met? = Don’t Accept Engagement
What are the preconditions for audit preconditions?
- Determine that a suitable framework is being used (UK GAAP, IFRS)
Acknowledgement by management of their responsibility
- Prepare FS in accordance to framework
- Internal controls to prevent fraud/errors
- Provide auditor with unrestricted access
What’s professional clearance?
Contacting The Existing Auditor.
Ask for the relevant information to aid decision to accept/reject
- Unpaid fees
- Client fees
What’s the purpose of professional clearance?
Checks if previous auditors has any professional ethical threat issues.
What does client reputation refer to?
The potential risk of the audit firm’s reputation if they accept a client with poor ethical practices.
What’s practice expertise?
Refers to whether the audit firms has the technical training and expertise to accept the engagement.
Imagine the audit of Best One VS Tesco.
Links to professional competence and due care.
What’s professional ethics and management integrity?
Refers to the potential conflict of interest or risk to objectivity
What’s resources available and fees?
Can we actually get the job done (staff-wise + deadlines)
Name 3 things the engagement letter contains
- Goal and scope of the audit
- Responsibilities of auditor
- Management responsibilities
- Identification of financial reporting standards
- Reference to expected form and content of any reports produced by the auditor
- A standard statement that states that there may be circumstances in which report content may differ as to what was expected.
Name 2 things outside ISA 210 that the engagement letter contains
- Basis on the determined fees
- Management agreement to do certain things
- Audit limitations
