PRE-LECTURE
PREPARATION MATERIAL
WEEK 4
q Chapter 5: Accepting the client
q Chapter 5: Timeline for the audit
q Chapter 6: Fraud
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CLIENT ACCEPTANCE
AND EVALUATION –
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Figure 5.2 Steps in accepting an audit
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Obtaining clients
• Advertising, publicity and solicitation are
permitted provided they are not false,
misleading, deceptive or otherwise reflect
adversely on the profession.
• Competing for prospective clients through
tenders is quite common.
• Auditors should be careful of audit clients
that are opinion shopping.
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Quality Control Policies and
Client Evaluation Procedures
• As part of Quality Control, audit firms have policies for:
Ø Investigating and evaluating potential new clients for
acceptance of a new engagement
Ø Periodically reviewing continuance of clients.
•
These procedures include:
– Obtaining and reviewing the client’s financial information
– Making inquiries of third parties, such as solicitors and bankers
– Communicating with previous auditor (only if permission granted)
– Evaluating the audit firm’s independence and ability to serve the
client, including technical skills, personnel and industry knowledge
– Ensuring that accepting engagement will not violate the Code of
Ethics (APES 110).
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Engagement Letter
• After accepting the audit appointment, ASA 210
requires that the auditor and entity agree on terms
of the engagement in an Engagement Letter.
• This letter is from the auditor to the client and is intended
to record the arrangements made with the client and
clarify matters that may be misunderstood.
• Engagement letters should include the following:
– Objectives and scope of the audit
– Responsibilities of the Auditor
– Responsibilities of Management
– Identification of the applicable Financial Reporting
Framework (i.e. criteria to be used to evaluate
whether the subject matter is “true and fair”)
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Your first time auditing a new
client – the “initial engagement”
• For the initial audit engagement, ASA 510/ISA 510
requires that the auditor obtains evidence that:
– the opening balances do not contain material
misstatements
– the previous periodʼs closing balances have been
correctly brought forward to the current period
– appropriate accounting policies are consistently
applied.
• Obtaining sufficient appropriate audit evidence about
opening balances could be facilitated by reviewing
audit working papers of previous auditor.
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TIMING OF AN AUDIT
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Overall timing of engagement
The three stages of the audit are planning, interim and final.
1.Obtaining an understanding of the entity and its
environment, assessing inherent risk and review of the
accounting system are part of planning. The study and
evaluation of internal control and assessment of control risk
span both the planning and interim phases.
2.The evidence gathering phase, performing tests of controls
and substantive procedures can be performed at either the
interim phase (before year-end) or final phase, (after yearend).
3.Some substantive tests (e.g. counting inventory) are best
done at balance date, others are best done close to
engagement completion.
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Audit timelines – 30 June year end
March
April
May
June
July
Aug
Gathering audit evidence
Sept
Issue
opinion
Exhibit 5.2 Overall timing
of engagement
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FRAUD
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Fraud (ASA 240)
• Fraud is defined in ASA 240.11 as:
“An intentional act by one or more individuals among
management, those charged with governance,
employees, or third parties, involving the use of
deception to obtain an unjust or illegal advantage.”
• There are two types of Fraud:
Fraudulent Financial
Reporting
Intentional misstatement or
omission of amounts or
disclosures with the intent to
deceive users
Misappropriation of
Assets
Theft of entity’s assets
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What is the auditor’s
responsibility to detect fraud?
• Kingston Cotton Mills
• Watchdog, not a bloodhound
• Pacific Acceptance
• Consider the possibility of fraud
• ASA 240
• Fraud triangle
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