PRE-LECTURE PREPARATION MATERIAL WEEK 4 q Chapter 5: Accepting the client q Chapter 5: Timeline for the audit q Chapter 6: Fraud Copyright © 2015 McGraw-Hill Education (Australia) Pty Ltd Gay & Simnett, Auditing and Assurance Services in Australia, 6e CLIENT ACCEPTANCE AND EVALUATION – Copyright © 2015 McGraw-Hill Education (Australia) Pty Ltd Gay & Simnett, Auditing and Assurance Services in Australia, 6e Figure 5.2 Steps in accepting an audit Copyright © 2015 McGraw-Hill Education (Australia) Pty Ltd Gay & Simnett, Auditing and Assurance Services in Australia, 6e 1 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. Copyright © 2015 McGraw-Hill Education (Australia) Pty Ltd Gay & Simnett, Auditing and Assurance Services in Australia, 6e 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). Copyright © 2015 McGraw-Hill Education (Australia) Pty Ltd Gay & Simnett, Auditing and Assurance Services in Australia, 6e 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”) Copyright © 2015 McGraw-Hill Education (Australia) Pty Ltd Gay & Simnett, Auditing and Assurance Services in Australia, 6e 2 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. Copyright © 2015 McGraw-Hill Education (Australia) Pty Ltd Gay & Simnett, Auditing and Assurance Services in Australia, 6e TIMING OF AN AUDIT Copyright © 2015 McGraw-Hill Education (Australia) Pty Ltd Gay & Simnett, Auditing and Assurance Services in Australia, 6e 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. Copyright © 2015 McGraw-Hill Education (Australia) Pty Ltd Gay & Simnett, Auditing and Assurance Services in Australia, 6e 3 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 Copyright © 2015 McGraw-Hill Education (Australia) Pty Ltd Gay & Simnett, Auditing and Assurance Services in Australia, 6e FRAUD Copyright © 2015 McGraw-Hill Education (Australia) Pty Ltd Gay & Simnett, Auditing and Assurance Services in Australia, 6e 4 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 Copyright © 2015 McGraw-Hill Education (Australia) Pty Ltd Gay & Simnett, Auditing and Assurance Services in Australia, 6e 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 Copyright © 2015 McGraw-Hill Education (Australia) Pty Ltd Gay & Simnett, Auditing and Assurance Services in Australia, 6e 5