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VICTOR NDATI OKILA BBM/2727/12 BBM 402- AUDITING THEORY & PRACTICE ASSIGNMENTS 1 LECTURER MR KOGEI

Question 1. Contents and importance of IAS 210 The purpose of international standard on auditing number 210 reiterates the importance of accepting an audit engagement only when the basis of which the audit is to be performed is expressly agreed. Agreement to the engagement is accepted by the auditor only when the following basis upon agreement is met. a) Establish whether the necessary preconditions for the audit are present and, b) Confirming there is a common understanding between the auditor and the company of the terms of audit engagement and of the respective responsibilities of the auditor, management and those charged with governance. The purpose of this internal standard ISA 210 is therefore to i) Agreeing the term of engagement with the client and
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ii)

The auditors response to a request by the client to change the term terms of an engagement to one that provides a lower level of assurance.

The auditor and the client should therefore put the terms agreed above in form of a written contract. The recorded agreed terms are put in terms of an engagement letter or other suitable form. IAS 210 assists auditor in the preparation in preparation of engagement letter relating to audits of financial statements. The standard also becomes applicable when other services such as taxation, accountancy or advisory services are to be provided. Separate letters may be appropriate. The principle content discussed in IAS 210 is the engagement letter. Engagement letter The content of the engagement letter will include among other things The objective of the audit Management responsibility of the financial statements The scope to the audit this include references to applicable legislation, regulations or pronouncements. Form of any report or communications of results to the engagement. Unrestricted access to whatever records, documentation, and other information requested in connection with the audit. Recurring audit This is also highlighted in ISA 210. Here the auditor should whether circumstances that have taken place require the terms of engagement to be revised and whether there is a need to remind the client of the existing terms of engagement. Acceptance for change in engagement.-this refers to the request from the client for the auditor to change the engagement. The auditor may before the completion of the audit engagement be

requested to change the engagement to one which provides a lower level of assurance, should consider the appropriateness of doing so.

Question 3. The following are the ways in which an auditor can reduce claims form third parties during or after the engagement. Third parties are individuals with whom the auditor does not have contractual relationship. An example will be lenders, potential investors, customers, suppliers and analysts. The following are some of the ways the auditor can use to reduce risk of third parties. Quality control- this can be done through preparation of written audit programs and proper working papers. Prepare a clear letter of engagement to prevent any misunderstanding that may arise. Taking professional indemnity assurance- This covers for any losses the auditor might incur in case there are claims for damages from third parties who relied on his report. Including disclaimer statements where appropriate. This is to cover himself in the event that he has given an opinion in an area where he is not an expert and a third party relies on the information. Comply with the generally accepted accounting standards and the codes of ethics. This minimizes the risk of the auditor making material misstatement on his report Obtaining a thorough knowledge of the client An auditor need to have knowledge of the clients business through understanding of the internal system so that he can note key areas that are prone to risks.

Taking legal and other special advice- Information gotten from expert is most of the time more reliable for any other source of information. Getting the right information will reduce the chances of errors hence reduces the risk of litigations from third parties.

Avoid risky audit assignments or carrying our more extensive work Risky audits may be where management is suspected to be involved in fraud or where the clients books of accounts are not in order.

Investigating prospective clients- Carrying our background check on the clients business before taking the engagement will help in early discoveries of areas or situations the company is in that may increase the risk of attracting legal proceedings from third parties. This can be prevented by doing a thorough background check on the client.

Question 4 List and explain rules of conduct of professional ethics that govern the behavior of an auditor as issued by ICPAK. Recently, because of many scandals in the corporate world, auditors are expected to follow specific code of conduct. It is necessary that the auditor exercises professional due care and follow the standards set forth by the regulatory bodies. The following are rules of professional conduct and professional ethics that govern the behavior of an auditor as issued by ICPAK i) Competence

An auditor should carry his work with due care and skill in tandem with professional and ethical standards laid down. The member should command authority in his profession by exhibiting knowledge in the work he is doing. He should have successfully passed all the required examinations to prove his competency in his area of field of work. A member should also refrain from taking assignments which he knows he is not qualified to do. ii) Integrity.

A member has to be honest, straight forward and sincere in his approach to audit work. Work should be performed with honesty and diligence. They should observe the law of disclosing any information expected by the law and profession. iii) Objectivity

Auditors are required to be objective when gathering, evaluating, and communicating information regarding an activity or process. Judgment should not be based on the interest of the auditor or the interest of others. iv) Confidentiality

An auditor is required to protect the information acquired from their clients. Information should not be disclosed without the proper legal authority or else there is professional obligation. v) Independence

A member in public practice should be or appear to be free in every professional assignments he undertakes of any interest which might destruct him from being objective. He should be able to stand his grounds when giving judgment on matters that he is sure whose facts are right and do not infringe on the accepted principal and guidelines of auditing. He should be impartial and not allow prejudices to bias to affect his judgment. He should be free from any interest that might conflict with the proper approach of his professional work. Guidance to matters of independence are given in situations where the auditor independence may be compromised. They include. a) Fees It is not right for the auditor to receive extraordinary high fees from a client or a group of client. b) Personal and family relations He should take steps to make sure family relations or personal relationships do not interfere with independence. c) Financial involvement with clients in form of
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Beneficial shareholdings Loans to and from client- this should be avoided at all costs.

d) Goods and services Members should resist from accepting goods and services from clients on terms that seem to be favorable to the generality of the clients employee. e) Receivership & Liquidation Where a company, a member is auditor goes into receivership, the member should not accept an appointment as a receiver manager unless at least two years have elapsed. f) Previous employment. A member having left employment from a company from a company he was offering service, should not accept to be engaged as an auditor until after 2 years have elapsed.