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PRE-ENGAGEMENT ACTIVITES
RAYMUND FRANCIS A. ESCALA, CPA, MBA

PRELIMINARY ENGAGEMENT ACTIVITIES

RAYMUND FRANCIS A. ESCALA, CPA MBA

PRELIMINARY ENGAGEMENT ACTIVITIES

MAJOR AUDIT PROCEDURES
In making a decision whether to accept or reject an engagement, the auditor’s firm should consider the following:

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1. Its competence;
2. Its independence;
3. Its ability to serve the client properly; and

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4. The integrity of the prospective client’s management.

To adequately address the above items, the auditor is expected to perform the following:

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1. Obtain a preliminary knowledge of the client’s business and industry to determine whether the auditor has the degree
of competence required by the engagement.
2. Consider whether there are any threats to the firm’s independence and objectivity, and if so, whether adequate
safeguards can be established.
3.
4.
5.
Evaluate auditability.
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Evaluate the firm’s ability to serve the prospective client.

Investigate the integrity of the prospective client’s management

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Investigation of the integrity of the client’s management may be performed through reading published articles, inquiry
to appropriate parties, or communication with the previous auditor subject to client’s permission.
Matters to be discussed with predecessor auditor include the following: (RID)
a. The predecessor’s understanding as to the Reasons for change in auditors;
b. Information that might bear on the Integrity of the management; and
c. Disagreements between the predecessor auditor and management as to accounting principles, auditing
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procedures, etc.
6. Agree on the terms of the engagement and prepare an engagement letter.
After considering the above factors, the auditor shall decide whether to accept or decline the proposed audit
engagement. If the auditor decided to accept the engagement, the auditor and the client shall agree on the terms of
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the engagement.

ACCEPTANCE OF AN ENGAGEMENT
Objective
The objective of the auditor is to accept or continue an audit engagement only when the basis upon which it is to be
performed has been agreed, through:
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a. Establishing whether the preconditions for an audit are present; and

b. Confirming that there is a common understanding between the auditor and management and, where appropriate,
those charged with governance of the terms of the audit engagement.

A. PRECONDITIONS FOR AN AUDIT

➢ 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.

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PRE-ENGAGEMENT ACTIVITIES

B. AGREEING THE TERMS OF AUDIT ENGAGEMENTS

The auditor shall agree on the terms of engagement with the client, represented by management or those charged
with governance, as appropriate. The agreed terms shall be recorded in an audit engagement letter or other
suitable form of written agreement.
It is in the interest of both the entity and the auditor that the auditor sends an engagement letter, preferably before
the commencement of the audit to help avoid misunderstandings with respect to the audit.
Form and Content of engagement letter
The form and content of audit engagement letters may vary for each client, but they would generally include reference

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to:
a. The objective and scope of the audit of the financial statements;
b. The responsibilities of the auditor;
c. The responsibilities of management;

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d. Identification of the applicable financial reporting framework for the preparation of the financial statements; and
e. Reference to the expected form and content of any reports to be issued by the auditor and a statement that there
may be circumstances in which a report may differ from its expected form and content.

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Furthermore, an audit engagement letter may make reference to, for example:
a. The presence of audit Risk (unavoidable risk because of inherent limitations of audit)
b. Unrestricted Access to whatever records
c. The financial reporting Framework used
d. Objective of the audit
e. The form of any Reports or other communication
f. Management’s responsibility
g. Elaboration of the Scope of the audit
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The auditor may also wish to include in the letter: (FRAP Reports)
a. Basis in which Fees are computed and any billing arrangements
b. Expectation of receiving Representation letter
c. Acknowledgment of management of terms of agreement
d. Arrangements regarding the Planning of the audit
e. Description of any other letters or Reports
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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 staff of the entity.
• Arrangements to be made with the previous auditor, if any, in the case of initial audit.
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• Any restriction of the auditor’s liability when such possibility exists.

• A reference to any further agreements between the auditor and the entity.
• Any obligations to provide audit working papers to other parties.
Audit of Components
When the auditor of a parent entity is also the auditor of its subsidiary, branch, or division (component), the factors
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that influence the decision whether to send a separate engagement letter to the component include the following:
• Who appoints the Component auditor;
• Legal requirements in relation to audit appointments;
• Degree of Ownership by parent;
• Whether a Separate auditor’s report is to be issued on the component; and
• Degree of Independence of the component’s management from the parent entity.

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Recurring Audits
On recurring audits, the auditor should consider whether circumstances require the terms of the engagement to be
revised and whether there is a need to remind the client of the existing terms of the engagement. The auditor may
decide not to send a new engagement letter each period.
However, the following factors may make it appropriate to revise the terms of the engagement, remind the entity of
existing terms, and/or send a new letter:
• Any indication that the client misunderstands the objective and scope of the audit.
• Any revised or special terms of the engagement.
• A recent change of management, board of directors or ownership.
• A significant change in ownership.

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• A significant change in nature or size of the client’s business.
• A change in legal or regulatory requirements.
• A change in financial reporting framework adopted in the preparation of the financial statements.

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• A change in other reporting requirements.

(See sample engagement letter in REO CPA Reviewer Application)

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ACCEPTANCE OF A CHANGE IN ENGAGEMENT
The auditor shall not agree to a change in the terms of the audit engagement where there is no reasonable justification for
doing so. Below are examples of circumstances that could lead to change in engagement and whether or not they are
reasonably justifiable:
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Circumstances
1. Change in circumstances affecting the need for the service
2. A misunderstanding as to the nature of an audit or related services originally requested
Reasonably
justifiable?
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3. A restriction on the scope of the engagement, whether imposed by management or caused by
circumstances
4. If the change relates to information that is incorrect, incomplete or otherwise unsatisfactory
5. The auditor is unable to obtain sufficient appropriate audit evidence regarding assertions
Auditor’s response
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If the terms of the audit engagement are changed, the auditor and management shall agree on and record the new terms
of the engagement in an engagement letter or other suitable form of written agreement.
If the auditor is unable to agree to a change of the terms of the audit engagement and is not permitted by management to
continue the original audit engagement, the auditor shall:
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a. Withdraw from the audit engagement where possible under applicable law or regulation; and
b. Determine whether there is any obligation, either contractual or otherwise, to report the circumstances to other
parties, such as those charged with governance, owners or regulators.

ILLUSTRATIVE QUIZZERS – PART 1

1. Preliminary engagement activities include:
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A. Setting materiality. C. Assessing audit risk at the account balance level.

B. Evaluating internal controls. D. Determining engagement team requirements.
2. In making a decision whether to accept or reject an engagement, the auditor’s firm should consider the following,
I. Its competence and independence
II. Its ability to serve the client properly
III. The integrity of the prospective client’s management
A. I and II C. I and III
B. II and III D. I, II and III

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PRE-ENGAGEMENT ACTIVITIES

3. Ultimately, the decision about whether or not an auditor is independent must be made by
A. Auditor C. Client’s management
B. Public D. Audit committee
4. On an audit engagement performed by a CPA firm with one office, at the minimum, knowledge of the relevant
professional accounting and auditing standards should be held by:
A. The auditor with final responsibility for the audit.
B. All professionals working upon the audit.
C. All professionals working upon the audit and the partner in charge of the CPA firm.
D. All professionals working in the office.
5.

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Which is not considered in deciding whether to accept an engagement?
A. Competence of the audit team C. Potential client’s reputation
B. Ethical considerations D. Type of opinion to be issued

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6. An auditor who accepts an audit engagement and does not possess the industry expertise of the business entity,
should
A. Engage financial experts familiar with the nature of the business entity.

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B. Obtain a knowledge of matters that relate to the nature of the entity's business.
C. Refer a substantial portion of the audit to another CPA who will act as the principal auditor.
D. First inform management that an unqualified opinion cannot be issued.
7. A CPA who has never audited a commercial bank
A. May not accept such an engagement.
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B. May accept the engagement only if the accounting firm specializes in the audit of commercial banks.
C. May accept the engagement after attaining a suitable level of understanding of the transactions and accounting
practices unique to commercial banking.
D. May accept the engagement because training as a CPA transcends unique industry characteristics.
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8. An auditor may most likely decide not to accept a new audit engagement when
A. The prospective client’s system is highly automated and the auditor lacks understanding of such system
B. The prospective client’s CEO is also the chairman of the governing board
C. The CPA has knowledge of the prospective client’s disregard of its responsibilities concerning internal controls
D. The CPA has knowledge that the prospective client has too many related-party transactions
C

9. The primary purpose of establishing quality control policies and procedures for deciding whether to accept a new
client is to
A. Enable the CPA firm to attest to the integrity of the client management.
B. Satisfy the CPA firm’s duty to the public concerning the acceptance of new clients.
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C. Minimize the likelihood of association with clients whose management lacks integrity.
D. Anticipate before performing any field work whether an unmodified opinion can be expressed.
10. When one auditor succeeds another, the proposed auditor should request the
A. Client to instruct its attorney to send a letter of audit inquiry concerning the status of the prior year’s litigation,
claims, and assessments.
B. Previous auditor to submit a list of internal control weaknesses that have not been corrected.
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C. Client to authorize the previous auditor to respond to inquiries.

D. Previous auditor to update the prior year’s report to the date of the change of auditors.
11. A proposed auditor makes specific inquiries of the previous auditor, prior to engagement acceptance, to
A. Have knowledge whether PFRS has been consistently applied
B. Inquire or significant subsequent events with respect to the prior period
C. Gain understanding on the reasons for the change of auditor
D. Compare audit fees

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12. Communication with a predecessor auditor is initiated by:

A. Management C. The audit committee of the board of directors
B. The successor auditor D. The chair of the board of directors
13. Which of the following should an auditor obtain from the previous auditor prior to accepting an audit engagement?
A. Analysis of balance sheet accounts. C. All matters of continuing accounting significance.
B. Analysis of income statement accounts. D. Facts that might bear on the integrity of management.
14. Before accepting an engagement to audit a new client, a CPA is required to obtain
A. An understanding of the prospective client’s industry and business.
B. The prospective client’s signature to the engagement letter.
C. A preliminary understanding of the prospective client’s control environment.

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D. The prospective client’s consent to make inquiries of the previous auditor, if any.
15. Which of the following factors most likely would influence an auditor’s determination of the auditability of an entity’s

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financial statements?
A. The complexity of the accounting system. C. The adequacy of the accounting records.
B. The existence of related-party transactions. D. The operating effectiveness of control procedures.

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16. Auditors must not only decide whether to accept new clients; they also should periodically review their list of current
clients and remove those clients the firm no longer wants to be associated with. Reasons for discontinuing clients
might include the following, except:
A. Difficulty in working with client personnel.
B. Inability to negotiate an acceptable increase in the audit fee.
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C. Evidence indicating a client’s management has integrity.
D. Client need for specialized services the current firm is unable or unwilling to provide.
17. Which of the following factors most likely would cause a CPA to not accept a new audit engagement?
A. The prospective client has already completed its physical inventory count.
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B. The CPA lacks an understanding of the prospective client's operations and industry.
C. The CPA is unable to review the predecessor auditor's audit documentation.
D. The prospective client is unwilling to make all financial records available to the CPA.
18. Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should be
rejected?
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A. The details of most recorded transactions are not available after a specified period of time.
B. Internal control activities requiring the segregation of duties are subject to management override.
C. It is unlikely that sufficient appropriate evidence is available to support an opinion on the financial statements.
D. Management has a reputation for consulting with several accounting firms about significant accounting issues.
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19. If permission from the client to discuss its affairs with the proposed auditor is denied by the client, the predecessor
auditor should:
A. Keep silent of the denial
B. Disclose the fact that the permission to disclosure is denied by the client
C. Disclose adequately to proposed auditor all noncompliance made by the client
D. Seek legal advice before responding to the proposed auditor
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20. A firm has obtained information that would have caused it to decline an engagement had the information been
available earlier. Actions available to the auditor would include the following, except:
A. Reporting the information and its implications to the person/s who appointed the CPA
B. Withdraw from the engagement
C. Withdraw from the client relationship
D. Issue a disclaimer of opinion

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PRE-ENGAGEMENT ACTIVITIES

ILLUSTRATIVE QUIZZERS – PART 2

1. It is the use by management of an acceptable financial reporting framework (e.g. PFRS) 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.
A. Engagement letter C. Preconditions for an audit
B. Written representation D. Fair presentation
2. According to PSA 210, the auditor and the client should agree on the terms of engagement. The agreed terms would
need to be recorded in a(n)
A. Client representation letter
B. Memo placed in the permanent section of the working papers

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C. Engagement letter
D. Comfort letter
3. The primary purpose of the engagement letter is to:

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A. Satisfy the requirements of the CPA’s liability insurance policy
B. Remind management that the primary responsibility for the financial statements rests with management
C. Provide a written record of the agreement with the client as to the services to be provided

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D. Provide a starting point for the auditor’s preparation of the preliminary audit program
4. An engagement letter is best described as
A. A letter from the company to the auditors specifying management’s expectations for completion of the audit on a
timely basis and the fees.

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B. A letter from the auditors to company management specifying that management is responsible for the financial
statements, and the auditors will issue an opinion on the financial statements.
C. A letter from the auditors to company management that specifies the responsibilities of both the company and the
auditors in completing the audit and the timing for its completion.
D. A letter from the Board of Directors’ audit committee to the auditor that indicates the auditor has been engaged to
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perform the audit and the fees to be paid.
5. Engagement letters are widely used in practice for:
A. Audits only C. Assurance engagements only
B. Related services only D. Professional engagements of all types
6.
C

The form and content of audit engagement letters may vary for each client, but they would generally include reference
to:
I. The objective and scope of the audit of the financial statements
II. The responsibilities of the auditor and management
III. Identification of the applicable financial reporting framework for the preparation of the financial statements
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A. I and II C. I and II
B. II and III D. I, II and III
7. The auditor may also wish to include in the engagement letter the following, except
A. Basis in which fees are computed and any billing arrangements
B. Expectation of receiving representation letter
C. Acknowledgment of management of terms of agreement
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D. Description of specific procedures to be performed during the audit

8. The terms of the audit engagement shall include: (choose the exception)
A. The objective of the audit C. The responsibilities of the auditor
B. The scope of the audit D. The overall audit strategy

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9. Which of the following matters is generally included in an auditor’s engagement letter?

A. Management’s responsibility for the entity’s compliance with laws and regulations.
B. The factors to be considered in setting preliminary judgments about materiality.
C. Management’s vicarious liability for illegal acts committed by its employees.
D. The auditor’s responsibility to search for significant internal control deficiencies.
10. Which of the following statements would least likely appear in an auditor’s engagement letter?
A. Fees for our services are based on our regular per diem rates, plus travel and other out-of-pocket-expenses.
B. Management is responsible for making all financial records and related information available to us.
C. Our engagement is subject to the risk that material errors or fraud, if they exist, will not be detected.
D. After performing our preliminary analytical procedures, we will discuss with you the other procedures we consider

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necessary to complete the engagements.
11. An engagement letter should ordinarily include information on the objectives of the engagement and
A B C D

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• CPA’s responsibilities Yes Yes Yes No
• Client’s responsibilities Yes No No No
• Limitations of engagement Yes Yes No No

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12. Assuming a recurring audit, in which of the following situations would the auditor be unlikely to send a new
engagement letter to the client?
A. A recent change in partner and/or staff involved in the audit engagement.
B. A change in the terms of engagement.
C. A recent change of client management.
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D. A significant change in the nature or size of the client's business.
13. The auditor should document the understanding established with a client through a(n)
A. Oral communication with the client. C. Written or oral communication with the client.
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B. Written communication with the client. D. Completely detailed audit plan.
14. Which of the following helps prevent misunderstandings during audit planning?
A. Auditor involvement in the preparation of the client’s financial records.
B. Client involvement in determining specific audit planning issues.
C. A preliminary meeting conference with the client to discuss fees, timing, client assistance and related issues.
C

D. Involvement of the client’s internal auditors in setting materiality levels and determining the scope of audit tests.
15. One of the first things that the auditor will do after accepting a new client is:
A. Communicate with the predecessor auditor.
B. Contact the client’s attorney to discover legal obligations.
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C. Study the client’s internal control structure.

D. Tour the client’s facilities.
16. Which of these circumstances would normally lead to a change in engagement?
A. Restrictions imposed by management C. Auditor’s inability to gather evidence
B. Financial statements departing from GAAP D. Misunderstanding as to the nature of the engagement
17. While performing procedures for the audit engagement, the auditor was asked to change the engagement to review.
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Assuming the change is not justifiable, which of these statements does not concur?
A. The auditor continues to perform audit procedures.
B. The auditor withdraws from the audit engagement.
C. The auditor communicates the matter to an appropriate level of management.
D. The auditor provides negative assurance on the new report.

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18. If the auditor concludes that there is reasonable justification for the change in engagement, the report to be issued
would
A. Be that appropriate for the revised terms of the engagement
B. Include reference to the original engagement
C. Include reference to any procedures that may have been performed in the original engagement
D. Not include reference to any procedures that may have been performed, particularly when the new engagement is
to undertake agreed-upon procedures
19. If a change in the type of engagement from higher to lower of assurance is not justified, the auditor should:
A. Qualify the report on the original engagement.
B. Continue with the revised engagement, but make explicit reference about the original engagement.

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C. Refuse to agree to management’s request on the change of engagement and continue with the original
engagement.
D. Withdraw from the engagement.

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20. An auditor who, before the completion of the engagement, is requested to change the engagement to one which
provides lower level of assurance, should
A. Withdraw and consider whether there is any obligation to report to other parties the circumstances necessitating

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the withdrawal.
B. Issue a report that includes reference to the original engagement and any procedures that may have been
performed in the original engagement.
C. Not agree to a change of engagement where there is reasonable justification for doing so.
D. Consider the change reasonable if it relates to information that is incorrect, incomplete or otherwise
unsatisfactory.
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“When you live for a strong purpose, then hard work isn’t an option. It’s a necessity.”
STEVE PAVLINA
PA
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