Audit process - Accepting an Engagement

• Audit process


  Sequence of different activities involved in an audit
• Steps in the audit process

  • Accepting an engagement
  • Audit planning
  • Considering internal control
  • Performing substantive tests
  • Completing the audit
  • Issuing a report
• Accepting an engagement


  1. Performing procedures regarding the continuance of the client relationship and the specific audit engagement

  2. Evaluating compliance with ethical requirements, including independence

  3. Establishing an understanding of the terms of the engagement
• Audit planning


  • Obtaining more detailed knowledge about the client's business and industry
  • Developing an overall audit plan and a detailed approach for the expected conduct and scope of the audit
• Considering internal control


  • Obtaining understanding of the entity's internal control systems
  • Assessing the level of control risk
• Performing substantive tests

  Designing and performing audit procedures to obtain reasonable assurance that the financial statements are presented fairly
• Completing the audit


  Performing additional audit procedures to become satisfied that the evidence gathered is consistent with the opinion to be expressed in auditor's report
• Issuing a report


  Forming a conclusion about the financial statements and communicating it to interested users
• Accepting an engagement

  • Considering the auditor's competence
  • Considering the auditor's independence
  • Considering the ability to serve the client properly
  • Considering the integrity of the prospective client's management
  • Considering the adequacy of the accounting records
• Auditor's responsibilities

  • Gathering and evaluating audit evidence
  • Forming a conclusion about the financial statements
  • Communicating the conclusion (opinion) through an audit report
• Factors to consider before accepting an audit engagement

  • Auditor's competence
  • Auditor's independence
  • Ability to serve the client properly
  • Integrity of the prospective client's management
  • Adequacy of the accounting records
• Competence

  Acquired through a combination of education, training and experience
• Before accepting an audit engagement, the auditor should obtain a preliminary knowledge of the client's business and industry to determine whether the auditor has the degree of competence required
• Independence


  Essential to the credibility of the auditor's report
• Before accepting an audit engagement, the auditor should consider whether there are any threats to the audit team's independence and objectivity and, if so, whether adequate safeguards can be established
• Ability to serve the client properly

  • Closely related to competence
  • Audit work should be assigned to personnel who have the appropriate capabilities, competence and time
  • There should be sufficient direction, supervision and review of work
• Pre-acceptance investigation procedures

  1. Making inquiries of appropriate parties in the business community

  2. Communicating with the predecessor auditor
• Refusal of the prospective client's management to permit communication with the predecessor auditor will raise serious questions as to whether the engagement will be accepted
• Inadequacy of the accounting records is sufficient reason for the auditor to decline an audit engagement
• Engagement letter

  A written contract between the auditor and the client that sets forth the terms of the engagement
• Contents of the engagement letter

  • Objective of the audit
  • Management's responsibility
  • Scope of the audit
  • Forms of reports or communication
  • Limitations of the audit
  • Client's responsibility to provide access to records
• The engagement letter serves to avoid misunderstandings and document the auditor's acceptance of the appointment
• For recurring audits, the auditor may send a new engagement letter due to factors such as client misunderstanding, revised terms, changes in management/ownership, or significant changes in the client's business
• When the auditor of a parent entity is also the auditor of its subsidiary, the auditor should consider factors such as who appoints the component auditor, whether a separate report is issued, legal requirements, extent of work by other auditors, degree of ownership, and independence of component management in deciding whether to send a separate engagement letter to the component