THE AUDIT PROCESS AND PREENGAGEMENT ACTIVITIES
UNIT 4
LEARNING OUTCOMES
• Explain the different types of services an audit firm can provide to
clients, and the type of assurance it will provide the users thereof.
• Understand the importance of compliance with the ISA’s.
• List and explain the different phases of the audit process, as well as
the steps of each phase. You should also understand the
interrelationship between each of the phases and steps of the audit
process.
• Define and describe the elements and objectives of performing
assurance engagements by professional accountants.
LEARNING OUTCOMES
• Explain the quality control policies and procedures to be applied by
audit firms and engagement teams.
• Explain the reasons for screening new, as well as existing clients.
• Discuss the sources available for the auditor to obtain knowledge
about new clients.
• List the issues to consider and the procedures to perform when
screening clients (pre-engagement activities).
• Explain the purpose of engagement letters, as well as the content
thereof.
LECTURE 1
1. Different types of services and assurances
2. Importance of compliance with the ISA’s
3. Audit Process
4. Elements and objectives of performing assurance
engagements
5. Quality control policies and procedures to be applied by
audit firms and engagement teams
1. Different types of services and assurances
NATURE OF
SERVICE
LEVEL OF
ASSURANCE
REPORT
Q: What’s the difference between
an audit, review and related
services?
2. Importance of compliance with the ISA’s
� IRBA is the statutory body controlling the auditing profession in SA.
� Within IRBA’s powers it prescribes the standards to which auditors
must comply with, when performing audits.
� Adopt IFAC and include:
- ISAs,ISAEs,ISRSs
� Must be applied to all audits of financial statements and to the audits
and reviews of other information and related services.
3. Audit Process
Know the subsections in the
audit process.
4. Elements and objectives of performing
assurance engagements
� An engagement will ONLY be an assurance engagement if all of the
following elements exist:
▪ Three-party relationship involving;
▪ Subject matter
▪ Suitable criteria
▪ Suitable appropriate audit evidence
▪ A written assurance report
4. Elements and objectives of performing
assurance engagements
� An engagement will ONLY be an assurance engagement if all of the
following elements exist:
▪ Three-party relationship involving:
4. Elements and objectives of performing
assurance engagements
� An engagement will ONLY be an assurance engagement if all of the
following elements exist:
▪ Subject Matter
4. Elements and objectives of performing
assurance engagements
� An engagement will ONLY be an assurance engagement if all of the
following elements exist:
▪ Suitable criteria
4. Elements and objectives of performing
assurance engagements
� An engagement will ONLY be an assurance engagement if all of the
following elements exist:
▪ Suitable appropriate audit evidence
4. Elements and objectives of performing
assurance engagements
� An engagement will ONLY be an assurance engagement if all of the
following elements exist:
▪ A written assurance report
5. Quality control policies and procedures to be
applied by audit firms and engagement teams
� Relates to policies and procedures adopted by a firm to provide
reasonable assurance that the firm and its personnel comply with
professional standards, regulatory and legal requirements and that the
reports issued by the firm or engagement partners are appropriate.
5. Quality control policies and procedures to be
applied by audit firms and engagement teams
� What does quality control ensure?
� What are the levels of quality control?
� Quality Control at Firm Level (ISQC 1)
� Quality Control at Audit Level (ISA 220)
� Why is documentation kept of quality control?
� What are the elements of quality control?
� 6 important definitions relating to quality control?
LECTURE 2
6. Reasons for screening new / existing
clients
- engagement activities (framework)
- engagement letters
6. Reasons for screening new / existing clients
� Applicable audit standards are:
✔ISA 220 – Quality control for an audit of financial
statements
✔ISA 300 – Planning an audit of financial statements
✔ISCQ 1 – Quality Control for firms
6. Reasons for screening new / existing clients
� Why do auditors need to perform engagement
activities?
Think about when you meet
someone for the first time…
your thoughts, reasoning.
6. Reasons for screening new / existing clients
� Why do auditors need to perform engagement
activities?
risks to the audit firm of unacceptable clients
▪ Legal liability
▪ Reputational damage
providing a quality audit
regulatory, statutory and ethical considerations
responsibility for client acceptance and continuance decisions
6. Reasons for screening new / existing clients
� How do you obtain engagement acceptance
procedures?
Method and timing of obtaining information: RAPs
BEFORE acceptance of engagement of new clients / start of
current year’s audit for existing clients
� Via RAPs ⇨ enquiries of management and others inside and
outside the entity, observation and inspection and analytical
reviews
� RAPs for NEW CLIENTS and EXISTING CLIENTS
� RAPs should all be documented
6. Reasons for screening new / existing clients
� Engagement Activity Procedures Framework
STEP 1: PERFORM A CLIENT INVESTIGATION
Consider the following:
Independence of auditor
Integrity of client (risk client and management)
Changes in entity for existing clients
Information obtained from communication with previous auditor
Financial responsibility of the client
Legal procedures i.r.o. the engagement
6. Reasons for screening new / existing clients
� Engagement Activity Procedures Framework DERMINE
THE SKILLS AND COMPETENCE REQUIRMENTS FOR THE
ENGAGEMENT (AUDITOR REQUIREMENTS)
Consider the following:
Firm personnel have knowledge of industry & subject matters
Firm personnel have relevant regulatory or reporting requirements / have ability to obtain
necessary skills and knowledge
Firm has sufficient personnel with necessary skills, competencies and expertise
Experts are available
Can audit deadline be met?
6. Reasons for screening new / existing clients
� Engagement Activity Procedures Framework
STEP 3: ESTABLISH THE TERMS OF THE ENGAGEMENT
Consider the following:
All engagements must be confirmed in writing through an engagement letter
Establishes a contractual relationship and should remove any misunderstanding
that may exist
Copy of engagement letter and confirmation of receipt thereof must be filed in the
working papers
6. Reasons for screening new / existing clients
� Engagement Letters
ISA 210: Agreeing the terms of audit engagement
PURPOS ENGAGEMENT LETTERS
Issued for audit engagements & other services to avoid any
misunderstanding between the client and the auditor with respect to
the engagement
Records the auditor’s acceptance of the engagement, his/ her
responsibilities to the client, objective and scope of the audit and the
format of any reports
6. Reasons for screening new / existing clients
� Engagement Letters
ISA 210: Agreeing the terms of audit engagement OF
ENGAGEMENT LETTERS
Each audit / other engagement
For recurring audits, letter need not be issued every year UNLESS the
auditor finds:
Indication/s that the client does not understand the objective and scope of the audit
Changes in senior management or board within the client
Significant change in ownership of the client
Significant changes took place regarding nature and size of entity’s business
Change in legal / regulatory requirements
Change in financial reporting framework adopted in the preparation of financial
statements
6. Reasons for screening new / existing clients
� Engagement Letters (refer to Module pg 6)
CONTENTS OF ENGAGEMENT LETTERS
Letterhead, address, salutation, introductory paragraph
Differentiate between audit, accounting & other services
Required information
Additional information and where applicable
Auditors responsibility for reporting irregularities to IRBA
Signed and dated
6. Reasons for screening new / existing clients
� Engagement Letters A CGE IN THE TERMS OF THE
AUDIT ENGAGEMENT
Auditor shall not agree to change the engagement where there is no
justification for doing so
Where auditor is requested to change engagement to a lower level of
assurance before the completion of the engagement:
✔ Auditor consider reasons and justifications
✔ Where auditor is unable to agree to a lower level of assurance and is not
permitted by management to continue with original engagement