Professional Documents
Culture Documents
Process of assurance:
obtaining an engagement
Contents
Introduction
Examination context
Topic List
1 Obtaining an engagement
2 Accepting an engagement
3 Agreeing terms of an engagement
Summary and Self-test
Technical reference
Answers to Self-test
Answers to Interactive questions
Introduction
Understand the key issues practitioners must consider before accepting engagements
Practical significance
In practice, the matters covered in this chapter are very important to assurance firms. It is important to
know how to obtain clients and therefore secure future revenue. It is important to only accept clients
which the firm is able to serve and engagements which the firm has the resources to carry out. It is
particularly important that all parties understand the nature of the work that will be carried out, as this may
prevent disputes and problems later on.
Another important area for practitioners is the increased client awareness and identification procedures
required to guard against involvement in money laundering. The crime of money laundering includes charges
which accountants may fall foul of. It is vital to practitioners that 'know your client' procedures are
understood by all staff and carried out properly.
Working context
During your training, you are unlikely to be involved in obtaining clients or determining whether an
engagement is going to be accepted. However, if you continue in your career to higher levels, even
partnership, then these will be important practical issues for you.
However, you are the face of the assurance firm when carrying out engagements, and you may be in a
position where it is necessary to clarify the scope of the work that you are carrying out to aid a client’s
understanding. In such a case, it might be necessary to refer to the terms of engagement between the firm
and the client, and it will be important that you understand what you are talking about, if asked.
Syllabus links
The issues of obtaining engagements will be looked at in much greater detail in the Audit and Assurance
paper at the Application level.
Examination context
Exam requirements
This is a fairly minor area for the exam, but you could expect at least one question on the scope of the
engagement (there is a question about engagement letters in the sample paper) and possibly another on the
considerations of the assurance firm when deciding to accept engagements.
In the assessment, candidates may be required to:
1 Obtaining an engagement
Section overview
Accountants may sometimes be invited to tender for an audit.
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 often invited to tender for particular engagements, which means that they offer a
quote for services, outlining the personnel, usually in competition with other firms which are tendering at
the same time.
In this syllabus, if the topics in this chapter are examined, it will be in the context of an accountant being
invited by a potential client to accept an engagement. We will go on now to look at the things which an
accountant must consider when he is so invited.
2 Accepting an engagement
Section overview
The present and proposed auditors should normally communicate about the client prior to the
audit being accepted.
The client must be asked to give permission for communication to occur. If the client refuses to give
permission, the proposed auditors must consider the reasons for such refusal.
The auditors must ensure they have sufficient resources (time and staff, for example) to carry out the
appointment.
This section covers the procedures that the auditors must undertake to ensure that their
appointment is valid and that they are clear to act.
Acceptance procedures
Ensure professionally qualified to act Consider whether disqualified on legal or ethical grounds,
for example if there would be a conflict of interest with
another client. We will look in more detail at ethical
issues later in this Study Manual.
Ensure existing resources adequate Consider available time, staff and technical expertise.
Acceptance procedures
Communicate with present auditors Enquire whether there are reasons/circumstances behind
the change which the new auditors ought to know, also as
a matter of courtesy.
Where the risk level of a company's audit is determined as anything other than low, then the specific risks
should be identified and documented. It might be necessary to assign specialists in response to these risks,
particularly industry specialists, as independent reviewers. Some audit firms have procedures for closely
monitoring audits which have been accepted, but which are considered high risk.
Generally, the expected fees from a new client should reflect the level of risk expected. They should also
offer the same sort of return expected of clients of this nature and reflect the overall financial strategy of
the audit firm. Occasionally, the audit firm will want the work to gain entry into the client's particular
industry, or to establish better contacts within that industry. These factors will all contribute to a total
expected economic return.
The audit firm will generally want the relationship with a client to be long term. This is not only to enjoy
receiving fees year after year; it is also to allow the audit work to be enhanced by better knowledge of the
client and thereby offer a better service.
Conflict of interest problems can be significant; the firm should establish that no existing clients will cause
difficulties as competitors of the new client. Other services to other clients may have an impact here, not
just audit.
The audit firm must have the resources to perform the work properly, as well as any specialist
knowledge or skills. The impact on existing engagements must be estimated, in terms of staff time and
the timing of the audit.
Review of documents Most recent annual accounts, listing particulars, credit rating
Review of rules and standards Consider specific laws/standards that relate to industry
Prospective auditors should seek the prospective client’s permission to contact the previous auditors. If this
permission is not given, the prospective auditors should consider carefully the reason for such refusal when
determining whether or not to accept the appointment. Normally permission will be given, so the
prospective auditors can write to the outgoing auditors.
Dear Sirs
We have pleasure in informing you that we have been appointed as auditors of “New Client Co Ltd” For
the year XX June, 200X. Since you were the previous auditors of the company, we would like to know
from you if there is any professional reason as to why we should not accept the appointment.
Acquiring & Co
Chartered Accountants
Having negotiated these steps the auditors will be in a position to accept the nomination, or not, as the case
may be.
Approach by potential
new audit client
No
Yes
Yes
Yes
Accept/reject
appointment
True False
Whether the firm can make sufficient profit from the engagement.
Ensure that the new auditors' appointment is valid. The new auditors should obtain a copy of
the resolution passed at the general meeting appointing them as the company's auditors.
Section overview
An engagement letter should be sent to all clients to clarify the terms of the engagement.
It must include an explanation of the scope of the audit, the limitations of an audit and the
responsibilities of auditors and those charged with governance.
Provide written confirmation of the firm’s acceptance of the appointment, the scope of the
engagement and the form of their report
If an engagement letter is not sent to clients, both new and existing, there is scope for argument about the
precise extent of the respective obligations of the client and its directors and the auditors. The elements of
an engagement letter should be discussed and agreed with management before it is sent.
An engagement letter for any type of assurance engagement will contain the same contents as an audit
engagement letter (discussed below). Clearly details will be different (for instance, it will cover the scope of
the engagement, but the scope of an audit and the scope of a review of forecast information, for example,
will be different). An engagement letter for an assurance engagement other than audit is likely to refer to
specific fees for the engagement. As you will see below, as an audit engagement is often recurring, specific
fees are initially not mentioned.
The scope of the audit, including reference to applicable legislation, regulations, or pronouncements
of professional bodies to which the auditor adheres.
The fact that because of the test nature and other inherent limitations of an audit, together with
the inherent limitations of any accounting and internal control system, there is an unavoidable risk that
even some material misstatement may remain undiscovered.
Request for the client to confirm the terms of the engagement by acknowledging receipt of the
engagement letter.
Description of any other letters or reports the auditor expects to issue to the client.
The confidentiality of any reports issued, and, if relevant, the terms under which they can be shared
with third parties.
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.
A reference to any further agreements between the auditor and the client.
financial statements. In arriving at our opinion, we are required to consider the following matters, and to
report on any in respect of which we are not satisfied:
Whether proper accounting records have been kept by the company and proper returns adequate
for our audit have been received from branches not visited by us
Whether the company's balance sheet and profit and loss account are in agreement with the
accounting records and returns, and
Whether we have obtained all the information and explanations which we consider necessary for the
purposes of our audit.
In addition, there are certain other matters which, according to the circumstances, may need to be dealt
with in our report.
We have a professional responsibility to report if the financial statements do not comply in any material
respect with applicable accounting standards, unless in our opinion the non-compliance is justified in the
circumstances. In determining whether or not the departure is justified we consider:
Whether the departure is required in order for the financial statements to give a true and fair view,
and
Including in our report a description of the directors' responsibilities for financial statements where
the financial statements or accompanying information do not include such a description, and
Scope of audit
Our audit will be conducted in accordance with the Bangladesh Standards on Auditing issued by the ICAB,
and will include such tests of transactions and of the existence, ownership and valuation of assets and
liabilities as we consider necessary. We shall obtain an understanding of the accounting and internal control
systems in order to assess their adequacy as a basis for the preparation of the financial statements and to
establish whether proper accounting records have been maintained by the company. We shall expect to
obtain such appropriate evidence as we consider sufficient to enable us to draw reasonable conclusions
therefrom.
The nature and extent of our procedures will vary according to our assessment of the company's
accounting system, and may cover any aspect of the business's operations that we consider appropriate.
Our audit is not designed to identify all significant weaknesses in the company's systems but, if such
weaknesses come to our notice during the course of our audit which we think should be brought to your
attention, we shall report them to you. Any such report may not be provided to third parties without our
prior written consent. Such consent will be granted only on the basis that such reports are not prepared
with the interests of anyone other than the company in mind and that we accept no duty or responsibility
to any other party as concerns the reports.
As part of our normal audit procedures, we may request you to provide written confirmation of certain
oral representations which we have received from you during the course of the audit on matters having a
material effect on the financial statements. In connection with representations and the supply of information
to us generally, we draw your attention to s 397A of the Companies Act 1994 under which it is an offence
for an officer of the company to mislead the auditors.
In order to assist us with the examination of your financial statements, we shall request sight of all
documents or statements, including the chairman's statement, operating and financial review and the
directors' report, which are due to be issued with the financial statements. We are also entitled to attend
all general meetings of the company and to receive notice of all such meetings.
The responsibility for safeguarding the assets of the company and for the prevention and detection of fraud,
error and non-compliance with law or regulations rests with yourselves. However we shall endeavour to
plan our audit so that we have a reasonable expectation of detecting material misstatements in the financial
statements or accounting records (including those resulting from fraud, error or non-compliance with law
and regulations), but our examination should not be relied upon to disclose all such material misstatements
or frauds, errors or instances of non-compliance as may exist.
(Where appropriate) We shall not be treated as having notice, for the purposes of our audit
responsibilities, of information provided to members of our firm other than those engaged on the audit (for
example, information provided in connection with accounting, taxation and other services).
Once we have issued our report we have no further direct responsibility in relation to the financial
statements for that financial year. However, we expect that you will inform us of any material event
occurring between the date of our report and that of the Annual General Meeting which may affect the
financial statements.
We look forward to full cooperation with your staff and we trust that they will make available to us
whatever records, documentation and other information are requested in connection with our audit.
[insert additional information here regarding fee arrangements and billings as appropriate]
This letter will be effective for future years unless it is terminated, amended or superseded.
Please sign and return the attached copy of this letter to indicate that it is in accordance with your
understanding of the arrangements for our audit of the financial statements.
XYZ & Co
Acknowledged on behalf of
ABC Company by
(signed)
...............
Summary
Self-test
Now answer the following questions.
1 An audit firm must not accept an engagement if the client is not previously known to them.
True
False
2 If a prospective client declines permission to contact the previous auditors, the audit firm should:
No need to follow
Yes professional rules – the
auditor can make own
decision
No
No
Yes
No
Yes
Yes
Accept/reject
appointment
decision
4 An engagement letter is only ever sent to a client before the first audit.
True
False
True
False
Now, go back to the Learning Objectives in the Introduction. If you are satisfied you have achieved these
objectives, please tick them off.
Technical reference
Answers to Self-test
1 False. However, if the client is unknown to the audit firm, they should seek references in respect of
key personnel associated with the client, and must carry out customer due diligence (as they must
with all clients).
2 D. Consider carefully the reasons for the refusal. It is helpful to the firm that the client allows this
contact, as the firm needs to know if there is an ethical reason that would bar them from taking up the
appointment. The auditors must not contact the previous auditors without permission as this would
be a breach of confidentiality.
3 Is this the first audit?
Does the client give permission to contact the old auditor?
Does the client give old auditor permission to reply?
Does the old auditor reply with information relevant to the new appointment?
4 False. It should be re-issued if there is a change in circumstances.
5 True