[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 240 & 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, 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 Engagement Partner, Specialist, Component Auditor
An outside specialist such as IT, environmental or tax specialist, may be needed to properly audit the client.
ISA 600 applies when an auditor, acting as a group engagement partner, decides to use the work of a component auditor in the audit of group financial statements. 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.
The group audit partner is solely responsible for the direction, supervision and performance of the group audit engagement and whether the auditor’s report that is issued is appropriate in the circumstances. (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
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 5.13
Auditor’s Expert• ISA 620 defines an Auditor’s expert as an
individual or organization 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, 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) Capabilities Objectivity
The auditor shall agree, in writing when appropriate, with the auditor’s expert: 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, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
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, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 5.16
Prior Auditor- First Time EngagementsIFAC Code of Ethics recommends that the new auditor 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 ordinarily 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 5.17
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 teamo Fee proposal
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 5.18
New Client Audit ProposalAn executive summaryClient’s business and audit expectationsStrengths of the audit firm Audit team Audit approachClient’s internal auditorsTransition needsOther services of the audit firmAfter service monitoringFee details
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
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. $ No contingency fees
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 5.20
The agreed terms of the audit engagement shall be recorded in an audit engagement letter or other suitable form of written
agreement and shall include:(a) The objective and scope of the audit;(b) The responsibilities of the auditor;(c) The responsibilities of management;(d) Identification of the applicable financial reporting
framework; and(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, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 5.21
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; and
Unrestricted access to persons within the entity from whom the auditor determines it necessary to obtain audit evidence.
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] © Pearson Education Limited 2007
Slide 5.22
Thank You for Your Attention
Any Questions?