CHAPTER 2:

PROCESS OF ASSURANCE:
OBTAINING AN ENGAGEMENT

Instructor: Dr. Tạ Thu Trang

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 STAGES OF AN AUDIT
Obtaining the engagement

Planning

Performing procedures

Review and completion

Reporting
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 Obtaining and accepting an
engagement
Obtaining an
After acceptance
engagement
Agreeing terms of an
Obtaining and engagement
planning
assurance Understanding the entity
engagements
Analytical procedures

Planning Materiality

Audit Risk

Audit strategy and plan

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 CHAPTER 2 LEARNING OBJECTIVES

2-1 Obtaining an engagement

2-2 Accepting an engagement
2-3 Agreeing terms of an engagement

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 OBJECTIVE 2-1
Obtaining an engagement

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 OBTAINING AN ENGAGEMENT
Obtaining an engagement

How assurance firms obtain clients is an important practical question,

but it is largely outside the scope of this syllabus. In brief, you should
be aware that:
• Accountants are permitted to advertise for clients within certain
professional guidelines
• Accountants are often invited to tender for particular engagements

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 OBJECTIVE 2-2
Accepting an engagement

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 ACCEPTING AN ENGAGEMENT
2.1.APPOINTMENT CONSIDERATIONS
This section covers the procedures that the auditors must undertake
to ensure that their appointment is valid and that they are clear to
act. This is covered in ISA (UK) 210 Agreeing the Terms of Audit
Engagements.
Auditors are normally appointed on an annual basis and by
shareholders' ordinary resolution. In some circumstances, such as for a
new organisation or breaching the audit threshold for the first time, the
directors may appoint auditors.
Appointment considerations
In gaining the information to determine whether they can accept the
appointment, the auditors would undertake a number of procedures.
The nominee auditors must carry out

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 ACCEPTING AN ENGAGEMENT
2.1.APPOINTMENT CONSIDERATIONS
Acceptance
Examples
procedures
Consider whether disqualified on legal or ethical
Professional
grounds, for example if there would be a conflict of
qualified
interest with another client
Does the assurance firm have sufficient resources
(time, staff, industry or specialised knowledge,
technical expertise)? If the client requires specialist
Adequate resources
assurance knowledge, such as an insurance client,
does the firm have sufficient expertise to undertake the
work?
Management If the directors are unknown to the assurance team, it is
integrity (obtain advisable to make further enquiries, such as obtaining
reference) references from a third party, such as a bank.
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 ACCEPTING AN ENGAGEMENT
2.1.APPOINTMENT CONSIDERATIONS
Acceptance
Examples
procedures

Understand the reasons or circumstances for the

Communicate with
change of auditor. This is also a matter of professional
previous auditor
courtesy.

Perform risk assessment procedures. Include an

Nature of
assessment of the industry-specific audit risks which
engagement (level
may affect the client and ensure the audit firm has
of risk – see
sufficient knowledge of relevant regulations, such as
additional table)
insurance or banking specific rules.
Perform procedures under Money Laundering
Identification Regulations to ensure compliance with professional
and legal safeguards

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 ACCEPTING AN ENGAGEMENT
2.1.APPOINTMENT CONSIDERATIONS

Further appointment procedures

The above procedures would involve the auditor undertaking a number
of steps.
• Is this the client's first audit? If it is not, then the outgoing auditors
will need to be contacted.
• The prospective auditors can ONLY contact the outgoing auditors if
the client gives them permission to contact the current auditors. If
this is refused by the potential client, then the auditor should decline
the engagement.

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 ACCEPTING AN ENGAGEMENT
2.1.APPOINTMENT CONSIDERATIONS

Further appointment procedures

• If permission is granted, then the auditor must write to the outgoing
auditors asking them to disclose all relevant information to them (ie
is there any professional reason as to why they should not accept
the engagement).
• Once the prospective auditor has received a response, then a full
assessment can be made regarding whether to accept the
appointment.

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 WORK EXAMPLE: ACCEEPTING APPOINTMENT

Read page 29 & 30 – Assurance

ICAEW Study guide

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 ACCEPTING AN ENGAGEMENT
2.2. MONEY LAUDERING REGULATIONS
Further appointment procedures
Due diligence
Due diligence is a general term that refers to the steps that should be
taken before taking an action in order to reduce the risk of adverse
consequences arising.
As part of the initial due diligence process, the assurance team should
undertake a review to consider whether the potential client is low or
high risk.
Consider some of the factors to look out for which may indicate low and
high risk clients:

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 ACCEPTING AN ENGAGEMENT
2.2. MONEY LAUDERING REGULATIONS
Further appointment procedures
Low risk High risk
Current or forecast financial issues or problems
Long term prospects
within the industry
Well financed Potential finance and/or cash flow issues
Strong internal controls Significant control weaknesses
Conservative Regularly changing accounting policies or ignoring
accounting policies them completely
Knowledgeable, Absentee key members of the management team or
competent management a high turnover of key members of staff
Few unusual Significant unexplained transactions or transaction
transaction with related parties

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 ACCEPTING AN ENGAGEMENT
2.2. MONEY LAUDERING REGULATIONS
To comply with the Money Laundering Regulations, assurance firms must
undertake 'client due diligence'.
This is mandatory to check the identify of clients before any work done if an
ongoing relationship is envisaged or a one-off transaction (or series of
transactions) worth more than €10,000 will take place.
Individuals
• Documents giving the full name and address of the client, plus identification
with a photograph
Companies
• Obtain information from the Registrar of Companies, to include certificate of
incorporation, the registered address and a list of director and shareholder.
Client identification documents must be kept for a minimum of five years and
until five years have elapsed since the relationship with the client in question
has ceased. It is also necessary to keep a full audit trail of all transactions with
the client.
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 AFTER ACCEPTANCE
Other assurance engagements

Similar considerations will be required

for any assurance engagements. The
legal considerations relating to audit
will not be relevant to other assurance
engagements, but the ethical, risk and
practical considerations will be just as
valid.

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 OBJECTIVE 2-3
Agreeing term of an engagement

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 AGREEING TERM OF AN ENGAGEMENT (AFTER ACCEPTANCE)
AUDIT ENGAGEMENT LETTERS
• Ensure proper removal/resignation of the outgoing auditor in
accordance with legislation – the new auditors should confirm this is
satisfactory by reviewing official documentation which provides
evidence of their resignation, such as minutes from a general
meeting and a valid notice of resignation.
• Ensure that the new auditors' appointment is valid by agreeing their
appointment to the resolution which is passed at the general meeting
to appoint new auditors.
• Submit a letter of engagement
• The new auditors should obtain all books and records belonging to
the client currently held by the previous auditor

A letter of engagement sets out the objectives, scope and

responsibilities of the audit. It outlines the reporting framework
and the form of any reports or opinions which may be given.
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 AGREEING TERM OF AN ENGAGEMENT (AFTER ACCEPTANCE)
AUDIT ENGAGEMENT LETTERS

The purpose of an
engagement letter

Define Provide written

responsibilities confirmation

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 AGREEING TERM OF AN ENGAGEMENT (AFTER ACCEPTANCE)

Audit engagement letters

The auditors should send an engagement letter to all new clients soon
after their appointment as auditors and, in any event, before the
commencement of the first audit assignment.

Key contents of the engagement letter shall be included:

• Objectives & Scopes of the assurance engagement
• Auditors' responsibilities
• Management' responsibilities* (including preparation of the financial
statements)
• Reporting framework
• Form of any report of results of the engagement

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 AGREEING TERMS OF AN ENGAGEMENT

Audit engagement letters

Remaining contents of the engagement letter may be included:
• Test nature and inherent limitation of an audit
• Planning of the audit
• Management written confirmation of representation
• Management of the audit (timings etc)
• Fees
• Confirm the term of the engagement.

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 AGREEING TERMS OF AN ENGAGEMENT
Audit engagement letters
When relevant, the following points could also be made:
• arrangements concerning the involvement of other auditors and experts in
some aspects of the audit
• arrangements concerning the involvement of internal auditors and other client
staff
• arrangements to be made with the predecessor auditor, if any, in the case of
an initial audit
• any restriction of the auditor’s liability when such possibility exists
• a reference to any further agreements between the auditor and the client
• any obligations to provide audit working papers to other parties

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 Interactive question 1: Engagement letters

Which three of the following may be contained within a letter of engagement?

A. Responsibilities of the auditors

B. Responsibilities of the directors
C. The names of the staff assigned to the engagement
D. The scope of the audit

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 WORK EXAMPLE: AUDIT ENGAGEMENT LETTER

Read page 33& 34 – Assurance

ICAEW Study guide

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 OBTAINING AN ENGAGEMENT
SUMMARY
Obtaining an
engagement

Obtaining and Agreeing terms of an

accepting an After acceptance
engagement
engagement

Management integrity Removal/resignation The engagement letter is

Adequate resources of outgoing auditor a contract between the
Nature of engagement Appointment as new company and the audit
(risk) auditor firm.
Identification Contents of engagement
Communicate with letter
previous auditor
Stability
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