SEMINAR. AUDIT ENGAGEMENT.

Question 1.
Suggest four reasons why an entity may wish to change its auditors.
1. Management and CAs do not cooperate or have challenges.
2. The company is expanding and becoming publicly traded, in which
case they must have its finances examined by an empanelled auditor.
3. Changes in auditing businesses, such as retirements or changes in
partners, have resulted in their being unable to take on some of their
old clients.
4. Change in management, with the new management wishing to hire
their own auditors or replace the current auditor to see if anything is
discovered. This frequently occurs when former management was
involved in fraud or mismanagement.

Question 2.
Board of directors of Wonderful Toys Manufacturing (WTM) addressed your firm to
act as a company’s statutory auditor for the next financial year. They plan to ask their
current auditor to resign as they say they do not provide a cost effective service.

Required:
Describe steps the audit firm should perform prior to accepting a new
engagement. (5 marks)

Prior to accepting
 Before accepting an audit engagement, the firm should think about any issues that
could jeopardize compliance with the ACCA's Code of Ethics and Conduct or any
local legislation. When problems develop, their importance must be considered.
 The company should assess whether they are qualified to do the job and whether
they have the necessary resources, as well as any specialized skills or knowledge.
 The prospective firm must engage with the departing auditor to determine whether
there are any ethical or professional reasons why they should not accept the
position.
 If the client does not give permission for the prospective firm to contact the
existing auditor, the appointment should be declined.
 If the incumbent auditor is unable to react because the client has not provided
permission, the prospective auditor should decline the engagement.
 If the incumbent auditor is given permission to respond, he or she should do so
to the prospective auditor, who should then carefully evaluate the response for
any flaws that would jeopardize acceptance.
 In addition, the audit firm should conduct client screening procedures, such as
evaluating management integrity and determining whether any potential
conflicts of interest with current clients exist.
 Additional client screening methods would involve determining the client's level
of audit risk and determining if the estimated engagement fee is enough for the
level of risk.

Question 3.
Once a firm has decided to go ahead with an audit engagement, it must comply with
the requirements of ISA 210, Agreeing the Terms of Audit Engagements. ISA 210 was
revised as part of the International Auditing and Assurance Standards Board’s Clarity
Project, with new requirements to perform specific procedures in order to establish
whether the preconditions for an audit are present.

Required:
Explain what is meant under preconditions of an audit. (5 marks)
It’s defined as follow: ‘The use by management of an acceptable financial reporting
framework in the preparation of the financial statements and the agreement of
management and, where appropriate, those charged with governance to the premise
on which an audit is conducted’
This necessitates two actions on the part of the auditor. First, the auditor must
assess the suitability of the financial reporting framework to be used in the financial
statement production. This includes determining whether the applicable financial
reporting structure is prescribed by law or regulation, as well as examining the
purpose of the financial statements and the type of the reporting entity (for
example, whether a listed company or a public sector entity). In most
circumstances, all that is required is a simple confirmation from the customer that
the financial statements will be prepared in accordance with International Financial
Reporting Standards (IFRS) or another national reporting framework.
Second, the auditor must acquire management's acknowledgment that it
understands and admits its responsibilities:
 The financial statements must be prepared in conformity with the applicable
financial reporting structure.
 Internal controls are required in order to prepare financial statements that are
free of material misstatement, whether due to fraud or error.
 To give the auditor all of the information he or she needs to complete the audit.