[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.

1] Pearson Education Limited 2007

Slide 5.1
Client Acceptance
Principles of Auditing: An Introduction to
International Standards on Auditing - Ch. 5
Rick Stephan Hayes,
Roger Dassen, Arnold Schilder,
Philip Wallage
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 5.2
Client Acceptance Phase Objectives
7Examination of the proposed client to determine
if there is any reason to reject the engagement
(acceptance OF the client) and convincing the
client to hire the auditor (acceptance BY the
client)
7Decide on acquiring a new client or continuation
of the relationship with and existing client
7Determine the type and amount of staff
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 5.3
Client Acceptance Procedures
- Evaluate the clients background and reasons for the
audit.
- Determine whether the auditor is able to meet the
ethical requirements regarding the client
- Determine need for other professionals.
- Communicate with predecessor auditor.
- Prepare client proposal.
- Select staff to perform the audit.
- Obtain an engagement letter.
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 5.4
Knowledge of a Clients Business Helps
Auditors
_ to evaluate the engagement risks associated
with accepting the specific engagement and
_to help the auditor in determining whether all
professional and ethical requirements
(including independence, competence, etc.)
regarding this client can be met.
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 5.5
preliminary examination of clients
New and existing clients
visiting their premises,
reviewing annual reports,
having discussions with client's
management and staff
accessing public news and
public information databases,
usually via the Internet.
For an existing one, prior years'
working papers should be
reviewed.
For a new client, consult prior
auditors and increase
preliminary information search.
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 5.6
Sources of Information for Client
Evaluation
Illustration 5.2
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 5.7
Evaluate governance, internal controls and possible
risks with client's management and staff including
+ Changes in management, organizational structure, and
activities of the client.
+ Current government regulations
+ Current business developments
+ Current or impending financial difficulties or accounting
problems.
+ Susceptibility of the entitys financial statements to material
misstatement due to error or fraud.(ISA 240 & ISA 315)
+ Existence of related parties. (ISA 550)
+ New or closed premises and plant facilities.
+ Recent or impending changes in technology, types of
products or services and production or distribution methods.
+ Changes in the accounting system and the system of internal
control.
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 5.8
New Client Review
_publicly available information,
_past company financial statements,
_reports to stockholders,
_government financial reports (e.g., U.S. SEC
10K report)
_company premises via tour
_previous auditor relationship
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 5.9
Illustration 5.3
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 5.10
Ability to Meet Audit Team Ethics
and Competence
Independence of auditor
(personal investments, client
business relationships, non-
audit services, unpaid fees)
Litigation
Technical training and
proficiency required in the
circumstances
Partner rotation (SOx 5yrs, EU
7yrs)
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 5.11
Group Engagement Partner, Specialist,
Component Auditor
An outside specialist such as IT, environmental or tax
specialist, may be needed to properly audit the client.
ISA 600 applies when an auditor, acting as a group
engagement partner, decides to use the work of a
component auditor in the audit of group financial
statements.
Component auditor An auditor who, at the request of the
group engagement team, performs work on financial
information related to a component for the group audit.
The group audit partner is solely responsible for the
direction, supervision and performance of the group audit
engagement and whether the auditors report that is issued
is appropriate in the circumstances. (Some countries (US)
allow divided responsibility, others dont.(UK, Australia,
Japan))
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 5.12
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 5.13
Auditors Expert
ISA 620 defines an Auditors expert as an
individual or organization possessing
expertise in a field other than accounting or
auditing, whose work in that field is used by
the auditor to assist the auditor in obtaining
sufficient appropriate audit evidence.
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 5.14
When using an experts work the auditor
MUST :
_Determine experts
_Competence (professional certifications)
_ Capabilities
_ Objectivity
_The auditor shall agree, in writing when appropriate, with
the auditors expert:
_ The nature, scope and objectives of that experts work
_The respective roles and responsibilities of the auditor
and that expert
_The nature, timing and extent of communication
_The need for the auditors expert to observe
confidentiality
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 5.15
Reference to the Auditors Expert in the
Auditors Report
The auditor shall not refer to the work of an
auditors expert in an auditors report containing
an unmodified (unqualified) opinion unless
required by law or regulation to do so.
.If the auditor makes reference to the work of an
auditors expert in the auditors report because
such reference is relevant to an understanding of a
modification to the auditors opinion, the auditor
shall indicate in the auditors report that such
reference does not reduce the auditors
responsibility for that opinion.
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 5.16
Prior Auditor- First Time Engagements
IFAC Code of Ethics recommends that the new
auditor communicate directly with the previous
auditor.
The proposed accountant should request
permission from the client to communicate with
existing accountant.
When the prior accountant receives the
communication, he should ordinarily reply
advising of any reasons why the proposed
accountant should not accept the appointment.
First time engagements require evidence that
opening balances are not misstated, prior
balances are correctly brought forward, and
proper accounting applied. (ISA 510)
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 5.17
Continuing Client Audit Proposal
o A review on how the auditing
firm can add value
o Plans for further improvement
in value added
o A description of the audit team
o Fee proposal
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 5.18
New Client Audit Proposal
OAn executive summary
OClients business and audit expectations
OStrengths of the audit firm
OAudit team
OAudit approach
OClients internal auditors
OTransition needs
OOther services of the audit firm
OAfter service monitoring
OFee details
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 5.19
professional fees should be a fair reflection of
$ the skill and knowledge required for the
type of professional services involved
$ the level of training and experience of the
persons performing the services
$ the time necessarily to perform services;
$ the degree of responsibility that
performing those services entails.
$ No contingency fees
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 5.20
The agreed terms of the audit engagement shall be recorded in
an audit engagement letter or other suitable form of written
agreement and shall include:
(a) The objective and scope of the audit;
(b) The responsibilities of the auditor;
(c) The responsibilities of management;
(d) Identification of the applicable financial reporting
framework; 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
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 5.21
Generally the Engagement Letter Should Also
Include
Access to all information of which management is
aware that is relevant to the preparation of the
financial statements such as records,
documentation and other matters;
Additional information that the auditor may
request from management for the purpose of the
audit; and
Unrestricted access to persons within the entity
from whom the auditor determines it necessary to
obtain audit evidence.
[Hayes, Dassen, Schilder and Wallage, Principles of Auditing An Introduction to ISAs, edition 2.1] Pearson Education Limited 2007
Slide 5.22
Thank You for Your Attention
Any Questions?