Client Acceptance Principles of Auditing: An Introduction to International Standards on Auditing - Ch. 5

Transcription

1 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

2 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

3 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.

4 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.

5 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.

6 Slide 5.6 Sources of Information for Client Evaluation Illustration 5.2

7 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 315) Existence of related parties. (ISA 550- Final Draft 2006) 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.

8 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

9 Slide 5.9 Illustration 5.3

10 Slide 5.10 Ability to Meet Audit Team Ethics and Competence Independence of auditor (personal investments, client business relationships, nonaudit services, unpaid fees) Litigation Technical training and proficiency required in the circumstances Partner rotation (SOx 5yrs, EU 7yrs)

11 Slide 5.11 Group Auditor and Other Auditor An outside specialist such as IT, environmental or tax specialist, may be needed to properly audit the client. ISA 600 (ED 2005) applies when an auditor, acting as a group auditor, decides to use the work of a related auditor or unrelated auditor in the audit of group financial statements. The group auditor is solely responsible for expressing an audit opinion on the group financial statements. (Some countries (US) allow divided responsibility, other s don t.(uk, Australia, Japan))

12 Slide 5.12 The Group Auditor should document the following in the audit work papers: The other auditor s professional qualifications, independence, professional competence and resources Significant risks of material misstatement that may arise from audit components and the group auditor s response to such risks. The basis for the group auditor s conclusion to accept or continue the engagement The results of the risk assessment performed at the group level, and a description of the audit procedures to be performed, The group auditor s communications with other auditors about the group auditor s requirements. The group auditor s conclusion on uncorrected misstatements, and the effect of the other auditors reports or memorandums of work performed on the groupaudit opinion.

13 Slide 5.13 Expert ISA 620 defines an expert as a person or firm possessing special skill, knowledge and experience in a particular field other than accounting and auditing.

14 Slide 5.14 When using an expert s work the auditor MUST : Determine expert s Competence (professional certifications) Experience Reputation Have client write instructions to the expert scope of the expert s work, coverage of expert s report intended use of the expert s work, access of the expert to files and records

15 Slide 5.15 Prior Auditor- First Time Engagements IFAC Code of Ethics requires the new auditor to 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 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)

16 Slide 5.16 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 team o Fee proposal

17 Slide 5.17 New Client Audit Proposal 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

18 Slide 5.18 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

19 Slide 5.19 Generally the Engagement Letter Should Include The objective of the audit Management responsibility for the financial information An applicable financial reporting framework The scope of the audit The form of any reports or other results The fact that some material misstatements may remain undiscovered Unrestricted access to all records, documentation, and other information requested in connection with the audit

20 Slide 5.20 Thank You for Your Attention Any Questions?