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Pre-engagement Phase
Pre-engagement planning includes procedures that are employed before the auditor begins to review the
internal control structure or to gather evidential matter. A CPA firm needs to establish policies and procedures for
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deciding whether to accept or continue a client in order to minimize the likelihood of association with a client
whose management lacks integrity. The reputation of a clients management could reflect on the reliability on
representations and accounting records and on the CPA firms own reputation.
Acceptance and Continuance of Clients
(Quality Control for Audits of Historical Financial Information PSA 220 revised par. 14 18 & PSQC 1 par.
28 35)
The engagement partner should be satisfied that appropriate procedures regarding the acceptance and
continuance of client relationships and specific audit engagements have been followed, and that conclusions
reached in this regard are appropriate and have been documented.
Acceptance and continuance of client relationships and specific audit engagements include considering:
Whether the firm and the engagement team can comply with ethical
requirements.
With regard to the integrity of a client, matters that the firm considers include, for example:
The identity and business reputation of the clients principal owners, key management, related
parties and those charged with governance.
Information concerning the attitude of the clients principal owners, key management and those
charged with governance towards such matters as aggressive interpretation of accounting
standards and the internal control environment.
Whether the client aggressively concerned with maintaining the firms fees as low as
possible.
Indications that the client might be involved in money laundering or other criminal activities.
The reasons for the proposed appointment of the firm and non-reappointment of the
previous firm.
Information on such matters that the firm obtains may come from, for example:
Inquiry of other firm personnel o third parties such as bankers, legal counsel and industry
peers.
In considering whether the firm has the capabilities, competence, time and resources to undertake a new
engagement from a new or an existing client, the firm reviews the specific requirements of the
engagement and the existing partner and staff profiles at all relevant levels. Matters the firm considers
include whether:
The firm has sufficient personnel with the necessary capabilities and
competence;
The firm is able to complete the engagement within the reporting deadline.
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The possibility of withdrawing from the engagement or from both the engagement and the client
relationship.
Addressee should be addressed to the body or person responsible for engaging and retaining firms
services. In the case of incorporated bodies, addressed either to the board chairman, the board of directors or
the appropriate representative of senior management.
B.
Principal Contents the form and contents of audit engagement letters may vary for each client, but
they would generally include reference to:
The financial reporting framework adopted by management in preparing the financial statements
The fact that because of the 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 or by affixing the clients signature on the space provided for in the
engagement letter for his conforme for the convenience of both the auditor and client
Description of any other letters or reports the auditor expects to issue to the client
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 case of an initial audit
A reference to any further agreements between the auditor and the client
D.
Audits of Components
When the auditor of a parent entity is also the auditor of its subsidiary, branch or division
(component), the factors that influence the decision whether to send a separate engagement letter to the
component include:
E.
F.
Legal requirements
An auditor who, before the completion of the engagement, is requested to change the engagement to one
which provides a lower level of assurance, should consider the appropriateness of doing so.
The change in engagement may result from a:
Change in circumstances affecting the need for the service
Misunderstanding as to the nature of the audit or related service originally requested
Restriction on the scope of the engagement whether imposed by management or caused by
circumstances
Where the terms of the engagement are changed, the auditor and the client should agree on new
terms.
The auditor should not agree to a change of the engagement where there is no reasonable justification for
doing so.
If the auditor is unable to agree to a change of the engagement and is not permitted to continue the
original engagement, the auditor should withdraw and consider whether there is any obligation, either
contractual or otherwise, to report to other parties, such as the board of directors or shareholders, the
circumstances necessitating the withdrawal.
D.
A. opinion of any subsequent events occurring since the predecessors audit report was issued
B. understanding as to the reasons for the change in auditors
C. awareness of the consistency in the application of GAAP between periods
D. evaluation of all matters of continuing accounting significance
18) Appointing the independent auditor early will enable
A. a more thorough audit to be performed
B. a sufficient understanding of internal control to be obtained
C. sufficient, competent evidential matter to be obtained
D. a more efficient audit to be planned
19) Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor
regarding
A. disagreements the predecessor had with the client concerning auditing procedures and accounting
principles
B. the predecessors evaluation of matters of continuing accounting significance
C. the degree of cooperation the predecessor received concerning the inquiry of the clients lawyer
D. the predecessors assessments of inherent risk and judgments about materiality
20) Which portion of an audit may not be completed before the balance sheet date?
A. Tests of controls
C. Issuance of management letter
B. Substantive testing
D. Assessment of control risk
21) Which of the following audit procedures would generally performed last?
A. obtaining management representation letter
C. testing the purchasing function
B. reading the minutes of directors meetings
D. confirming accounts payable
22) A prospective clients refusal to grant a CPA permission to communicate with the predecessor auditor will bear
directly on the CPAs ability to
A. study and evaluate the clients system of internal control
B. determine the integrity of the management
C. determine the beginning balances of the current years financial statements
D. establish consistency in application of GAAP between years
23) If the auditor has concerns about the integrity of management, which of the following would not be an
appropriate action?
A. refuse to accept the engagement because a client does not have an inalienable right to an audit
B. expand audit procedures in areas where management representations are normally important by
requesting outside verifiable evidence
C. raise the audit fees to compensate for the risk inherent in the audit
D. plan the audit with a higher degree of skepticism including specific procedures that should be effective in
uncovering management fraud
24) After preliminary audit arrangements have been made, an engagement letter should be sent to the client. The
letter usually would not include
A. a reference to the auditors responsibility for the detection of errors and irregularities
B. an estimate of time to be spent on the audit work by staff & management
C. a statement that management advisory services would be made available upon request
D. a statement that management letter will be issued outlining comments and suggestions as to any
procedures requiring the clients attention
25) Which of the following is not included in the engagement letter?
A. restriction on cash balances, lines of credits or similar arrangements
B. accessibility to all financial records
C. client imposed limitation in the scope
D. limitation in the scope of examination as imposed by circumstances
26) Which of the following statements would least likely appear in an auditors engagement letter?
A. Fees for our services are based on our regular per diem rates, plus travel and other out-of-pocket
expenses
B. During the course of our audit we may observe opportunities for economy in, or improved controls over
your operations
C. Our engagement is subject to the risk that material errors or irregularities, including fraud and
defalcations, if they exist, will not be detected
D. After performing our preliminary analytical procedures we will discuss with you the other procedures we
consider necessary to complete the engagement
27) Assuming a recurring audit, in which of the following situations would the auditor be unlikely to send a new
engagement letter to the client?
A. Recent change in partner involved in the audit engagement
B. Change in the terms of the engagement
C. Recent change of the clients management
D. Significant change in the nature or size of the clients business
28) Which of the following audit procedures would generally be performed during the year-end field work?
A. Count of petty cash
B. Analysis of cut-off bank statement
C. Comparison of data on purchase orders and payment vouchers
D. Examination of lease agreements
29) Which of the following procedures is least likely to be performed before the balance sheet date?
A. Confirmation of accounts receivable
B. Search for unrecorded liabilities
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C. Observation of inventory
D. Review of internal accounting control over cash disbursements
30) To be proficient as an auditor, a person must first be able to accomplish which of these tasks in a decisionmaking process:
A.
Identify evidence relevant for the audit of assertions management makes in its unaudited financial
statements and notes.
B.
Formulate evidence-gathering procedures (audit program) designed to obtain sufficient,
competent evidence about assertions management makes in financial statements and notes.
C.
Recognize the financial assertions made in management's financial statements and footnotes.
D.
Evaluate the evidence produced by the performance of procedures and decide whether
management's assertions conform to generally accepted accounting principles and reality.
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