PRELIMINARY

ENGAGEMENT
ACTIVITIES
AUDIT AND ASSURANCE PRICIPLES |
UNIT 3
OVERVIEW
An audit of financial statements generally begins with the financial
statements prepared by the entity. Without these financial statements,
there would be no audit to perform. A general approach to auditing
financial statements would require consideration of financial
statement assertions, audit procedures and audit evidence.
LEARNING OUTCOMES
After successful completion of this unit, you should be able to:
1. Describe the considerations prior accepting, continuing or rejecting an
engagement offer
2. Define the need for Engagement letter and it’s essential requisites.
Purpose of Preliminary
Engagement Activities:
Preliminary engagement activities assist the auditor in identifying and evaluating
events or circumstances that may adversely affect the auditor’s ability to plan and
perform the audit engagement. Such activities help ensure that:
a. There are no issues with client management’s integrity that may affect the
willingness to continue the engagement
b. The auditor maintains the necessary independence and ability to perform the
engagement
c. There is no misunderstanding with the client as to the terms of the engagement
 PRELIMINARY
ENGAGEMENT
ACTIVITIES
1. Perform procedures regarding acceptance
or continuance of the client relationship
Acceptance or selection procedures – in case of initial audit (prospective/new client)

Evaluate integrity of the client’s management:

• Evaluation of management integrity is necessary to avoid association with clients whose management lacks integrity.
• Most of litigations involving CPAs are due to lack of integrity of client’s management.
• Lack of management integrity usually results to high audit risk.
• Factors to consider in evaluating client’s integrity:
Identity, attitude and business reputation of the client (such as its principal owners, key management or those
charge with corporate governance, and related parties, if any)
Nature of the client’s operations
Indications of an inappropriate limitation in the scope of work
Involvement in money laundering or other criminal activities
The reasons for the proposed appointment of the CPA firm or auditor and non-reappointment of the previous CPA
firm or auditor
1. Perform procedures regarding acceptance
or continuance of the client relationship
A. Investigate/research the client’s background
B. Inquiring from other firm personnel or third parties
C. Communicate with prospective client’s predecessor auditor

Under the Code of Ethics for CPAs, the successor auditor has the responsibility to initiate
communication with the predecessor auditor. However, the communication requires prior
client’s permission/consent (preferably in writing) to avoid violation of confidentiality
principle.

D. Other Considerations
1. Perform procedures regarding acceptance
or continuance of the client relationship
Continuance or retention procedures – in case of recurring audit (or existing client)

To ensure the audit firm’s continuing compliance with acceptance and continuance procedures,
existing clients should be evaluated once a year or upon occurrence of the following:

Changes in management, directors or ownership

Nature of client’s business
2. Evaluate compliance with ethical
requirements
A. Independence – The CPA firm or auditor shall identify, evaluate and respond
to any threat to independence
B. Professional competence – determine if the CPA firm or auditor has the
necessary skills and competence
C. Ability to serve the client properly – the CPA firm or auditor must have
capability, time and resources to perform the audit
 3. Establish an understanding of the
terms of the engagement
The CPA firm or auditor shall accept or continue an audit engagement only when the preconditions for
an audit are present:

1. Management has used acceptable financial reporting framework (or suitable criteria or appropriate
basis for) in the preparation of the financial statements

2. Management agrees to the premise that it has acknowledged and understood its responsibilities

If the preconditions for an audit are not present, the auditor shall not accept the proposed audit
engagement, unless acceptance is required by law or regulation. Preconditions for an audit are within
the control of the entity.
Agreement on audit engagement terms

The auditor shall agree on the terms of the audit engagement

with management or those charged with governance, as
appropriate. Such agreed terms shall be recorded in an audit
engagement letter or other suitable form of written
engagement.
Agreement on audit engagement terms
Preliminary conference: A preliminary conference with the client is scheduled after the CPA has
determined that:

 The firm is independent

 The firm is competent to perform the audit
 The firm can serve the client properly, and
 The client’s reputation is one of integrity
Agreement on audit engagement terms
The terms of engagement are usually agreed with the client during a preliminary conference
with the client and formalized through a signed engagement letter. During the preliminary
conference, the auditor and client agree on the following issues:

The specific services to be rendered

The cooperation and work expected to be performed by the client’s personnel
Expected start and completion dates of the engagement
The possibility that the completion date may be changed if unforeseen audit problems arise if
unforeseen audit problems arise if adequate cooperation from client’s personnel is not received
The nature and limitations of the audit engagement
An estimate of the fee to be charged for the engagement
Engagement letter
An agreement between the CPA firm or auditor and the client for the conduct of
the audit. It is a letter from the auditor to the client management, and when signed
by the client it serves as a formal written contract between them.

Engagement letter documents and confirms the:

a. Auditor’s acceptance of the appointment
b. Client’s acceptance of the terms of the audit engagement
c. Responsibilities of both the client management and the auditor
d. Arrangements or agreed terms of the engagement
Engagement letter
Importance (primary reason) of an engagement letter: It clarifies the nature of the
engagement and the responsibilities of management and those of the auditor. This
will help in avoiding or minimizing or resolving future misunderstandings
disagreement between the auditor and the client with respect to the engagement,
Engagement letter should be sent to the client preferably before the start of the
engagement.
 ILLUSTRATIVE
ENGAGEMENT LETTER
Engagement Letter Sample.pdf
 THANK YOU!
PRELIMINARY ENGAGEMENT ACTIVITIES | UNIT 3