hayes-ed3-2014-ch-05

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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has been replaced by an incoming auditor).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 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, 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
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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:
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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.
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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
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Competence (professional certifications)
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Capabilities (experience and reputation)
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Objectivity.
• The auditor should write instructions to the auditor’s
expert which cover:
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The nature, scope and objectives of that expert’s work
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The respective roles and responsibilities of the auditor and
that expert
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The nature, timing and extent of communication
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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
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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?
Hayes, Gortemaker and Wallage, Principles of Auditing PowerPoints on the Web, 3rd edition © Pearson Education Limited 2014
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