BACHELOR OF ACCOUNTING

ACC718 – AUDITING AND

ASSURANCE SERVICES

TO P I C 3 : A U D I T P L A N N I N G

P R E PA R E D B Y J O H N AWA K A R I
LECTURE OUTLINE
1. Introduction
2. Client Evaluation
3. Ethical and legal considerations
4. Audit Engagement
1. INTRODUCTION
• The initial phase of a financial statement audit involves a
decision to accept the opportunity to become the auditor
for a new client or to continue as auditor for an existing
client.
• First the entity requests the audit,
• In accepting an engagement, an auditor takes on
professional responsibilities to the public, the client and
other members of the public accounting profession.
• The client’s best interests must be served with
competence and professional concern.
1. STEPS IN ACCEPTING AN AUDIT ENGAGEMENT

A. Client evaluation
B. Ethical and legal consideration
C. Engagement
A. CLIENT EVALUATION
• Client evaluation is an important element of quality
control.
• The engagement partner shall be satisfied that appropriate
procedures regarding the acceptance and continuance of
client relationships and audit engagements have been
followed, and shall determine that conclusions reached in
this regard as appropriate.
A.1. EVALUATING THE INTEGRITY OF
MANAGEMENT.
• Auditors main role is to express an opinion on the financial
statements prepared by management.
• When management lacks integrity, there is a greater
likelihood that material errors and irregularities may occur
in the accounting process from which the financial
statements are prepared.
• The auditor seeks reasonable assurance that an entity’s
management can be trusted.
A.1. EVALUATING THE INTEGRITY OF
MANAGEMENT.
1. For new client, proposed auditor may obtain information
about the integrity of management by communicating
with the predecessor auditor.
2. Making enquiries of other third parties.
3. For an existing client, the auditor should consider
previous experience with the clients’ management.
A.1.1 COMMUNICATING WITH EXISTING AUDITORS
• Code of Ethics for Professional Accountants indicates that
an accountant in public who is asked to replace another
professional accountant in public practice or who is
considering tendering for an engagement currently held by
another professional accountant should determine
whether there are reasons for not accepting the
engagement.
AREAS OF COMMUNICATION
• The proposed auditor who is asked to replace the existing
auditor must ask the prospective client’s permission to
communicate with the existing auditor,
• If refused, the auditor decline the engagement.
• If permission granted, the prospective auditor ask the
existing auditor (in writing) to supply all information that
should be made available to enable the proposed auditor
to make a decision as to whether to accept the audit
engagement.
MAKING ENQUIRIES OF OTHER 3 RD PARTIES.
• Reviewing previous experience with existing clients
• Identifying special circumstances and unusual risks
REVIEWING PREVIOUS EXPERIENCE WITH EXISTING
CLIENTS
• before making a decision to continue an engagement with
an existing audit client, the auditor should carefully
consider previous experiences with the entity’s
management such as:
– material errors or irregularities and
–Illegal acts discovered in previous audits.
REVIEWING PREVIOUS EXPERIENCE WITH EXISTING
CLIENTS.
• The auditor makes enquiries of management about such
matter as:
–existence of contingencies,
–Completeness of all minutes of board meetings and
–Compliance with regulatory requirements.
• How management’s response to such enquiries in previous
audits should be carefully considered in the evaluation of
the integrity of management.
IDENTIFYING SPECIAL CIRCUMSTANCES AND
UNUSUAL RISKS
• Accepting an engagement includes:
–Identifying the intended users of the audited financial
statements,
–Making a preliminary assessment of the prospective client’s
legal and financial stability,
–Evaluating the entity’s auditability.
IDENTIFYING THE INTENDED USERS OF THE AUDITED
FINANCIAL STATEMENTS
• Auditor’s legal responsibilities in an audit vary based on the
intended users of the financial statements.
• Auditor should consider the prospective client’s status as:
–Private or public company, any named beneficiaries or
foreseen 3rd parties to whom the potential for liability exist
under common law.
ASSESSING A PROSPECTIVE CLIENT’S LEGAL

• If an entity experiences legal difficulties and if plaintiffs can

find any pretext for claiming reliance on the financial
statements then such litigation will make auditor incur
other financial costs of defending themselves.
• From this reason, auditors may attempt to identify and
reject prospective client that pose a high risk of litigation.
FINANCIAL STABILITY
• Auditors may reject client known to be experiencing
financial instability, such as an inability to meet debt
payments or to raise needed capital.
EVALUATING THE ENTITY’S AUDITABILITY
• The auditor should evaluate whether other conditions
exist that raise questions as to the prospective client’s
auditability. This includes:
–The absence or poor condition of important accounting
records,
–Management’s disregard of its responsibility for maintaining
other elements of an adequate internal control structure,
ETHICAL AND LEGAL CONSIDERATIONS
• Auditor should comply with the ethical requirements of
the profession’s auditing standards, legislation and
regulation and the terms of the audit engagement.
• Evaluating independence
• Assessing competence to perform the audit
• Determining ability to use due care.
EVALUATING INDEPENDENCE
• Before accepting a new client, the auditor must evaluate
whether there are any circumstance that would compromise
its independence.
• Circulate the name of a prospective clients to all professional
staff to identify any financial or business relationships
inconsistent with independence.
• If such relationship exist auditor should decline the offer.
• Also the firm should determine that acceptance of the client
engagement would not result in any conflict of interest with
other clients.
EVALUATING INDEPENDENCE

• For continuing audit, independence questionnaire may be

completed annually for each client to ensure ongoing
compliance with the firm’s quality control policies and
procedures on independence.
• Another area where the firm should evaluate
independence is in the provision of non-assurance service
to audit clients.
ASSESSING COMPETENCE TO PERFORM THE AUDIT
• The firm should have appropriate quality control over
human resources (such as hiring, continuing professional
development and advancement) to ensure that there are
sufficient personnel within the organisation with the
necessary capabilities, competence, commitment to ethical
principles.
• Audit team should have: a partner, an audit manager, one or
more seniors and staff assitants.
DETERMINING ABILITY TO USE DUE CARE.
• Ethical principles require the auditor to exercise due care
in performing the audit and preparing the report.
• The auditor should decline an engagement if due
professional care cannot be exercised throughout the
audit.
• Determination of due care may involve:
–A review of both the work done and judgement exercised
by those assisting in the audit.
DETERMINING ABILITY TO USE DUE CARE.
• The responsibility for ensuring that this is done on an audit
engagement rests with the engagement partner.
• Audit partner supervises the process of the audit
engagement, resolving significant issues that and
• Identifying matters that require more experience staff.
• Involves evaluating the progress of individual members of
the engagement team to ensure that they understand what
they are doing and have the time to perform their work.
AUDIT ENGAGEMENT LETTERS
• Once the auditor has satisfied with his/her preliminary finding, he/she
must confirm the terms of engagement in an engagement letter.
• The content of the letter should include:
– The objective and scope of the audit of the financial report
– The responsibilities of the auditor
– The responsibilities of the management,
– Identification of the applicable financial reporting framework for the
preparation of the financial report.
– Reference to the expected form and content of any reports to be
issued by the auditor.
SUMMARY
• Before carrying out audit work, engagement letter must be
done first.
• This engagement letter is the form of contract that bind
the auditor in carrying out his/her audit work.
• After submitting the engagement letter, the next phase is
for the auditor to draw up audit plan. This is what we are
going to cover next.
 THE END
ANY QUESTIONS???