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Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014

Slide 5.1

Principles of Auditing: An Introduction to

International Standards on Auditing

Chapter 5 – Client Acceptance

Rick Hayes, Hans Gortemaker

and Philip Wallage

Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014

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 an existing client

• Determine the type and amount of staff.

Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014

Slide 5.3

Client acceptance procedures

• Evaluate the client’s 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• Communicate with predecessor auditor (someone who was previously the auditor of an entity and who has been replaced by an incoming auditor).

• Prepare client proposal.

• Select staff to perform the audit.

• Obtain an engagement letter.

Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014

Slide 5.4

Auditor’s main reasons for obtaining an

understanding of a client’s business

• To evaluate the engagement risks associated with

accepting the specific engagement

• To help the auditor in determining whether all

professional and ethical requirements (including

independence, competence, etc.) regarding this

client can be met.

Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014

Slide 5.5

Preliminary examination of clients

• New and existing clients– visiting their premises

– reviewing annual reports

– having discussions with client’s managementand 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, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014

Slide 5.6

Sources of information for client evaluation

Illustration 5.2 Sources of Information for Client Evaluation

Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014

Slide 5.7

Evaluate governance, internal controls and possible

risks with client’s management and staff including

• Changes in management, organisational 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 240 and ISA 315)

• Existence of related parties (ISA 550)

• 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, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014

Slide 5.8

Illustration 5.3 Three Major Influences on the Continuance of the Relationship

Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014

Slide 5.9

Ability to meet audit team ethics and

competence

• The audit team should meet ethics requirements.

• Litigation with the client jeopardises independence.

• Audit team must have a degree of technical training and proficiency required in the circumstances.

• Partner rotation is generally required (US every 5 years, EU every 7 years).

Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014

Slide 5.10

Specific competencies

• On the basis of the specific circumstances of the client

and its industry, the auditor should determine if the

necessary expertise regarding the industry, specific

GAAP issues or certain non-audit skills are available to

the audit team.

• Review existing partner and staff competencies:

• knowledge of relevant industries or subject matters;

• experience with relevant regulatory or reporting

requirements;

• ability to complete the engagement within the reporting

deadline;

• individuals meeting the criteria and eligibility requirements

to perform engagement quality control review are available.

Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014

Slide 5.11

Group engagement partner, specialist,

component auditor

• An outside specialist such as IT, environmental or tax specialist, may be needed to properly audit the client.

• If a group auditor, decides to use the work of a component auditor on the audit, the group auditor determines the scope of the work to be performed and communicates the plan to the component auditor.

• Component auditor – An auditor who, at the request of the

group engagement team, performs work on financial

information related to a component for the group audit.

• Generally, the group auditor takes sole responsibility for the audit opinion on the group financial statements and does not refer to the other auditor in the auditor’s report. (In some countries under certain conditions, a division of responsibilities is allowed.)

Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014

Slide 5.12

Use the work of another auditor

When the group auditor decides to use the work

of another auditor she should consider:

• the professional qualifications, independence,

professional competence and resources of the

other auditor;

• the quality control processes of the other auditor’s

firm.

Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014

Slide 5.13

Auditor’s expert

• ISA 620 defines an auditor’s expert as an

individual or organisation possessing expertise

in a field other than accounting or auditing,

whose work in that field is used by the auditor

to assist the auditor in obtaining sufficient

appropriate audit evidence.

Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014

Slide 5.14

When using an expert’s work the

auditor MUST:

• Determine expert’s

• Competence (professional certifications)

• Capabilities (experience and reputation)

• Objectivity.

• The auditor should write instructions to the auditor’s expert which cover:

• The nature, scope and objectives of that expert’s work

• The respective roles and responsibilities of the auditor and

that expert

• The nature, timing and extent of communication

• The need for the auditor’s expert to observe confidentiality.

Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014

Slide 5.15

Reference to the auditor’s expert in the

auditor’s report

• The auditor shall not refer to the work of an

auditor’s expert in an auditor’s report containing an

unmodified (unqualified) opinion unless required by

law or regulation to do so.

• If the auditor makes reference to the work of an

auditor’s expert in the auditor’s report because

such reference is relevant to an understanding of

a modification to the auditor’s opinion, the auditor

shall indicate in the auditor’s report that such

reference does not reduce the auditor’s

responsibility for that opinion.

Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014

Slide 5.16

Prior auditor – First time engagements

• IESBA Code of Ethics recommends that the new auditor communicate directly with the previous auditor.

• The proposed auditor should request permission from the client to communicate with the existing auditor.

• When the prior auditor receives the communication, he should ordinarily reply advising of any reasons why the proposed auditor should not accept the engagement.

• First time engagements require evidence that opening balances are not misstated, prior balances are correctly brought forward, and proper accounting applied. (ISA 510)

Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014

Slide 5.17

Continuing client audit proposal

• A review on how the auditing firm can add

value

• Plans for further improvement in value

added

• A description of the audit team

• Fee proposal.

Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014

Slide 5.18

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

• Appendix

Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014

Slide 5.19

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

• Contingency fees (no fee will be charged unless

a specified finding or result is obtained) are not

allowed for audits in many countries.

Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014

Slide 5.20

Commissions and referral fees

• An auditor may receive a referral fee or commission

• For example, when she does not provide the specific

service required, a fee may be received for referring a

client to another auditor or other expert.

• However, accepting such fees creates a self-interest

threat. If the treat is significant, safeguards should be

applied.

• A auditor may also pay a referral fee to obtain a client

• For example, where the client requires specialist

services not offered by the existing auditor.

Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014

Slide 5.21

The form and content of the audit engagement

letter may vary but should be a written

agreement and should include

a. The objective of the audit

b. The responsibilities of the auditor

c. The responsibilities of management

d. The applicable financial reporting framework

e. Reference to the expected form and content of any

reports to be issued by the auditor and a statement

that there may be circumstances in which a report

may differ from its expected form and content.

Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014

Slide 5.22

Generally the engagement letter should

also include

• Access to all information of which

management is aware that is relevant to the

preparation of the financial statements such

as records, documentation and other matters.

• Additional information that the auditor may

request from management for the purpose of

the audit.

• Unrestricted access to persons within the

entity from whom the auditor determines it

necessary to obtain audit evidence.

Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014

Slide 5.23

Thank you for your attention

Any Questions?