Scribd
Upload
225 views4 pages

Accepting An Engagement

The audit process begins with an auditor accepting an audit engagement of a client's financial statements. The auditor considers (1) financial statement assertions about transactions, accounts, and disclosures that will be audited, (2) audit procedures like inspection, observation, and analytical procedures that will be used to gather evidence, and (3) the evidence that will be obtained from documents, records, and other sources to evaluate the assertions. Before accepting, the auditor evaluates their competence and independence, the client's integrity, and whether the engagement can be performed properly. An engagement letter is issued to document the objective, responsibilities, and terms of the audit.

Uploaded by

Ralph Ean Braza
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
225 views4 pages

Accepting An Engagement

The audit process begins with an auditor accepting an audit engagement of a client's financial statements. The auditor considers (1) financial statement assertions about transactions, accounts, and disclosures that will be audited, (2) audit procedures like inspection, observation, and analytical procedures that will be used to gather evidence, and (3) the evidence that will be obtained from documents, records, and other sources to evaluate the assertions. Before accepting, the auditor evaluates their competence and independence, the client's integrity, and whether the engagement can be performed properly. An engagement letter is issued to document the objective, responsibilities, and terms of the audit.

Uploaded by

Ralph Ean Braza
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 4

THE AUDIT PROCESS

ACCEPTING AN ENGAGEMENT
An audit of financial statements generally begins with the financial statements prepared by the entity’s
management. Without these financial statements, there would be no audit to perform. A general approach to auditing
financial statements would require consideration of (1) financial statement assertions, (2) audit procedures, and (3)
audit evidence.

I. Financial Statement Assertions


A. Assertions about classes of transactions and events for the period under audit:
1. Occurrence- transactions and events that have been recorded have occurred and pertain to the
entity.
2. Completeness- all transactions that should have recorded have been recorded.
3. Accuracy- amounts and other data relating to recorded transactions and events have been recorded
appropriately.
4. Cut-off- transactions and events have been recorded in the correct accounting period.
5. Classification- transactions and events have been recorded in the proper accounts.

B. Assertions about account balances at the period end:


1. Existence- assets, liabilities, and equity interests exist.
2. Rights and obligations- the entity holds or controls the rights to assets, and liabilities are the
obligations of the entity.
3. Completeness- all assets, liabilities and equity interests that should have been recorded have been
recorded.
4. Valuation and allocation- assets, liabilities, and equity interests are included in the financial
statements at appropriate amounts and any resulting valuation or allocation adjustments are
appropriately recorded.

C. Assertions about presentation and disclosure:


1. Occurrence and rights and obligations - disclosed events, transactions, and other matters have
occurred and pertain to the entity.
2. Completeness- all disclosures that should have been included in the financial statements have been
included.
3. Classification and understandability- financial information is appropriately presented and
described, and disclosures are clearly expressed.
4. Accuracy and valuation- financial and other information are disclosed fairly and at appropriate
amounts.

1|Page | AUDITING THEORY


II. AUDIT PROCEDURES
The procedures selected should enable the auditor to gather sufficient appropriate evidence about a particular assertion
and should use assertions to form a basis for the assessment of risks and design and performance of further audit
procedures in response to the risk.
A. Inspection- involves examining of records, documents, or tangible assets.
B. Observation- consists of looking at a process or procedure being performed by others.
C. Inquiry- consists of seeking information from knowledgeable persons inside or outside the entity.
D. Confirmation- consists of the response to an inquiry to corroborate information contained in the accounting
records.
E. Computation- consists of checking the arithmetical accuracy of source documents and accounting records or
performing independent calculations.
F. Analytical Procedures- consists of the analysis of significant ratios and trends including the resulting
investigation of fluctuations and relationships that are inconsistent with other relevant information or deviate
from predicted amounts.

III. EVIDENCE
Audit Evidence- refers to the information obtained by the auditor in arriving at the conclusions on which the
audit opinion is based.
A. Source documents and accounting records underlying the financial statements
C. Corroborating information from other sources

Things to consider in deciding whether to accept or reject an audit engagement:


Preliminary Activities (PSA300) – preliminary understanding of the client’s business and background
investigation of the prospective client
A. Competence- Determine whether the auditor has the necessary skills and competence to handle the
engagement. Professional accountants should not portray themselves as having expertise which they do not
possess. Competence is acquired through a combination of education, training and experience.

B. Independence- Before accepting an audit engagement, the auditor should consider whether there are any
threats to the audit team’s independence and objectivity, if so, whether adequate safeguards can be
established.

C. Ability to serve the client properly - An engagement should not be accepted if there are no enough
qualified personnel to perform the audit. In addition, there should be sufficient direction, supervision and review
of work at all levels in order to provide reasonable assurance that the firm’s standard of quality is maintained in
the performance of the engagement.

D. Integrity of management (PSA 220)


a. Making inquiries of appropriate parties in the business community- such as banker, legal counsel, or
underwriter to obtain information about the reputation of the client.
b. Communicating with the predecessor auditor - should obtain client’s permission to communicate;
refusal of this will be a question of accepting the engagement
2|Page | AUDITING THEORY
i. reasons for the change of auditors
ii. disagreement between the predecessor auditor and the client
iii. integrity of the prospective client’s management

Retention of existing clients


Clients should be evaluated at least once a year or upon the occurrence of major events such as
changes in management, directors, ownership, nature of client’s business, or other changes that may affect
the scope of the examination. In general, conditions which would have caused an accounting firm to reject a
prospective client may also result or lead to a decision of terminating an audit engagement.

Engagement letter
This serves as the written contract between the auditor and the client.
 The objective of the audit of the financial statements.
 The management’s responsibility.
 The scope of the audit.
 The forms or any reports or other communication that the auditor expects to issue.
 The fact that there is an unavoidable risk that material misstatement may remain undiscovered.
 The responsibility of the client to allow the auditor to have unrestricted access to whatever records,
documentation and other information requested in connection with the audit.
In addition, the auditor may also include the following items:
 Billing arrangements
 Expectations of receiving management representation letter
 Arrangements concerning the involvement of others
 Request for the client to confirm the terms of the engagement

A. Importance of the engagement letter- for the interest of both parties


a. Avoid misunderstandings with respect to the engagement
b. Document and confirm the auditor’s acceptance of the appointment.

B. Recurring audits
Factors that may cause the auditor to send a new engagement letter:
a. Any indication that the client misunderstands the objective and scope of the audit
b. Any revised or special terms of the engagement
c. A recent change of senior management, board of directors or ownership
d. A significant change in the nature or size of the client’s business
e. Legal requirements and other government agencies’ pronouncements

If the auditor decides not to send a new engagement letter, it may be appropriate to the auditor to remind the
client of the original arrangements.

C. Audits of Components

3|Page | AUDITING THEORY


When the auditor of a parent entity is also the auditor of its subsidiary, branch or division (component), the
auditor should consider the following factors in making a decision of whether to send a separate letter to the
component:
a. Who appoints the auditor of the components.
b. Whether a separate audit report is to be issued on the component.
c. Legal requirements
d. The extent of any work performed by other auditor.
e. Degree of ownership by parent.
f. Degree of independence of the component’s management.
|END|

4|Page | AUDITING THEORY

You might also like