[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

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007

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

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007

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.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007

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.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007

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.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007

Slide 5.6

Sources of Information for Client

Evaluation

Illustration 5.2

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007

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.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007

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

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007

Slide 5.9

Illustration 5.3

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007

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)

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007

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))

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007

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 engagement

The 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.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007

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.

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007

Slide 5.14

When using an expert’s work the auditor

MUST :

Determine expert’s

Competence (professional certifications)

Experience

Reputation

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

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007

Slide 5.15

Prior Auditor- First Time Engagements

IFAC 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)

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007

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 team

o Fee proposal

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007

Slide 5.17

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

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007

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

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007

Slide 5.19

Generally the Engagement Letter Should Include

The objective of the audit

Management responsibility for the financial

information

An applicable financial reporting framework

The scope of the audit

The form of any reports or other results

The fact that some material misstatements may

remain undiscovered

Unrestricted access to all records,

documentation, and other information requested

in connection with the audit

[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007

Slide 5.20

Thank You for Your Attention

Any Questions?