PRELIMINARY
ENGAGEMENT
Auditing Theory
Chapter 4
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.
WHAT AN AUDITOR’S FIRM SHOULD
CONSIDER WHEN DECIDING WHETHER TO
ACCEPT OR REJECT THE ENGAGEMENT?
WHAT AN AUDITOR’S FIRM SHOULD
CONSIDER WHEN DECIDING WHETHER TO
ACCEPT OR REJECT THE ENGAGEMENT?
It’s competence.
WHAT AN AUDITOR’S FIRM SHOULD
CONSIDER WHEN DECIDING WHETHER TO
ACCEPT OR REJECT THE ENGAGEMENT?
It’s competence.
Its independence.
WHAT AN AUDITOR’S FIRM SHOULD
CONSIDER WHEN DECIDING WHETHER TO
ACCEPT OR REJECT THE ENGAGEMENT?
It’s competence.
Its independence.
It’s ability to serve the client
properly.
WHAT AN AUDITOR’S FIRM SHOULD
CONSIDER WHEN DECIDING WHETHER TO
ACCEPT OR REJECT THE ENGAGEMENT?
It’s competence.
Its independence.
It’s ability to serve the client
properly.
The integrity of the prospective
client’s management.
STEPS/PROCEDURE THAT AN AUDITOR SHOULD
DO WHEN ADDRESSING THE PRIOR ITEMS.
STEPS/PROCEDURE THAT AN AUDITOR SHOULD
DO WHEN ADDRESSING THE PRIOR ITEMS.
1st—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.
STEPS/PROCEDURE THAT AN AUDITOR SHOULD
DO WHEN ADDRESSING THE PRIOR ITEMS.
2nd—Consider whether there are any threats to the
firm’s independence and objectivity, and if so,
whether adequate safeguard should be
established.
STEPS/PROCEDURE THAT AN AUDITOR SHOULD
DO WHEN ADDRESSING THE PRIOR ITEMS.
3rd—Evaluate the firm’s ability to serve the
prospective client.
STEPS/PROCEDURE THAT AN AUDITOR SHOULD
DO WHEN ADDRESSING THE PRIOR ITEMS.
3rd—Evaluate the firm’s ability to serve the
prospective client.
4th—Evaluate auditability
STEPS/PROCEDURE THAT AN AUDITOR SHOULD
DO WHEN ADDRESSING THE PRIOR ITEMS.
5th—Investigate the integrity of the prospective
client’s management.
STEPS/PROCEDURE THAT AN AUDITOR SHOULD
DO WHEN ADDRESSING THE PRIOR ITEMS.
5th—Investigate the integrity of the prospective
client’s management.
6th —Agree on the terms of engagement and
prepare an engagament letter.
ACCEPTANCE OF AN ENGAGEMENT
ACCEPTANCE OF AN ENGAGEMENT
OBJECTIVE
ACCEPTANCE OF AN ENGAGEMENT
OBJECTIVE
To accept or continue an audit
engagement only when the basis upon
which it is to be performed has been
agreed through:
ACCEPTANCE OF AN ENGAGEMENT
a) Establishing whether the
preconditions for an audit are
present; and
ACCEPTANCE OF AN ENGAGEMENT
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.
Pre-conditions for an audit
Pre-conditions for an audit
1) The use of applicable financial
reporting framework by the
management
Pre-conditions for an audit
1) The use of applicable financial
reporting framework by the
management
2) Agreement with the management
regarding the premise on which the
audit is conducted.
AGREEING TO THE TERMS
AND CONDITIONS
AGREEING TO THE TERMS
AND CONDITIONS
• The auditor shall agree on the terms of
engagement with the client.
AGREEING TO THE TERMS
AND CONDITIONS
• The auditor shall agree on the terms of
engagement with the client.
• Agreed terms shall be recorded in an audit
engagement letter or other suitable form of
agreement.
AGREEING TO THE TERMS
AND CONDITIONS
• The auditor shall agree on the terms of
engagement with the client.
• Agreed terms shall be recorded in an audit
engagement letter or other suitable form of
agreement.
• An agreement letter is in the interest of
both the entity and the auditor.
AGREEING TO THE TERMS
AND CONDITIONS
• The auditor shall agree on the terms of
engagement with the client.
• Agreed terms shall be recorded in an audit
engagement letter or other suitable form of
agreement.
• An agreement letter is in the interest of
both the entity and the auditor.
• It must be sent before the commencement of
the audit.
FORMS AND CONTENT OF ENGAGEMENT LETTER
FORMS AND CONTENT OF ENGAGEMENT LETTER
o IT MAY VARY FOR EACH CLIENT BUT THEY WOULD
INCLUDE REFERENCE TO:
FORMS AND CONTENT OF ENGAGEMENT LETTER
o IT MAY VARY FOR EACH CLIENT BUT THEY WOULD
INCLUDE REFERENCE TO:
The objective and scope of the audit of the
financial statements.
The responsibilities of the auditor.
The responsibilities of management.
The applicable financial reporting framework.
Reference to the expected form and content of
any reports.
IMPORTANT NOTES!
IMPORTANT NOTES!
1.) If law or regulation prescribes
sufficient detail the terms of the audit
engagement, the auditor need not record them
in a written agreement, except for the fact
that such law or regulation applies and that
management acknowledges and understands its
responsibilities.
IMPORTANT NOTES!
2.) Even if the objective and scope of an
audit and the responsibilities of management
and the auditor may be sufficiently
established by the law of a particular
country, the auditor may nevertheless
consider it appropriate to include the
matters in an engagement letter for the
information of management.
CONTINUATION
The audit engagement letter may make
reference to, for example, (RA FORMS)
1.) The presence of audit Risk (unavoidable
risk because of inherent limitation of
audit)
2.) Unrestricted Access to whatever
records.
3.) The financial reporting Framework used.
CONTINUATION
The audit engagement letter may make
reference to, for example, (RA FORMS)
4.) The Objective of the audit.
5.) The form of any Reports or other
communication.
6.) Management’s responsibility.
7.) Elaboration of the Scope of the audit.
CONTINUATION
The auditor may also wish to include in
the letter: (FRAP Reports)
1.) Basis in which Fees are computed and
any billing arrangements.
2.) The expectation of Receiving
Representation letter.
3.) Acknowledgement of management of terms
of agreement.
CONTINUATION
The auditor may also wish to include in
the letter: (FRAP Reports)
4.) Arrangements regarding the Planning of
the audit.
5.) Description of any other letters or
Reports.
AUDIT OF COMPONENTS
In auditing, a component is a division,
subsidiary, joint venture, or branch
whose financial information is included
in the group financial statements. The
group auditor may not audit all
components directly—some may be audited
by component auditors.
AUDIT OF COMPONENTS
• 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.
• Degree of Independence of the Components.
Managements from the Components entity.
RECURRING AUDITS
Refers to an audit engagement that is
carried out on a regular basis,
typically annually, for the same
client.
It involves auditing a client’s
financial statements for consecutive
accounting periods.
RECURRING AUDITS
• Any indication that the client
understands the objective and the scope
of audit.
• Any revised or special terms of the
engagement.
• A recent change of management, board of
directors or ownership.
• A significant change of ownership.
RECURRING AUDITS
• 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
• A change in other reporting requirements
ACCEPTANCE OF A CHANGE IN ENGAGEMENT
If, prior to completing the audit
engagement, the auditor is requested
to change the audit engagement to an
engagement that conveys a lower level
of assurance, the auditor shall
determine whether there is reasonable
justification for doing.
Below are examples of circumstances that could lead to
change in engagement and whether or not they are
reasonably justifiable:
EDITOR SHALL
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.
THANK YOU!
Auditing Theory
Chapter 4
