CHAPTER 4

Accepting an Engagement
 FINANCIAL STATEMENT ASSERTIONS

Existence or Occurrence
Rights and Obligations

Completeness AUDIT
Financial PROCEDURES
Statements Valuation and Allocation

Presentation and
Disclosure

AUDIT AUDIT
OPINION EVIDENCES
FINANCIAL STATEMENT
ASSERTION
 These assertion may fall into the
following categories:
 Assertion about classes of transactions
and events for the period under audit
 Assertions about account balances at
the period end
 Assertions about presentation and
disclosure
Assertions about classes of transaction and
events for the period under audit:

•Occurrence – transactions and events that have been

recorded have occurred and pertain to the entity.
•Completeness – all transactions and events that should
have been recorded have been recorded.
•Accuracy – amounts and other data relating to recorded
transactions and events have been recorded appropriately.
• Cutoff – transactions and events have been recorded in
the correct accounting period.
•Classification – transactions and events have been
recorded in the proper accounts.
Assertions about account balances at the period
end:
•Existence – assets, liabilities, and equity interests
exist.
•Rights and Obligations – the entity holds or controls
the rights to assets, and liabilities are the obligations of
the entity.
•Completeness – all assets, liabilities, and equity
interests that should have been recorded have been
recorded.
• Valuation and Allocation – assets, liabilities and
equity interests are included in the financial statements
at appropriate amounts and any resulting valuation or
allocation adjustments are appropriately recorded.
Assertions about presentation and
disclosure:
•Occurrence and rights and obligations – disclosed
events, transactions and other matters have occurred
and pertain to the entity.
•Completeness – all disclosures that should have
been included in the financial statements have been
included.
•Classification and understandability – financial
information is appropriately presented and described
and disclosures are clearly expressed.
•Accuracy and Valuation –financial and other
information and disclosed fairly and at appropriate
amounts.
AUDIT PROCEDURES
- Selection of appropriate procedures to
satisfy a particular assertion is affected by a
number of factors including the auditor’s
assessment of materiality and risk.
Regardless of the procedures selected,
there is only one basic criterion. The
procedures selected should enable the
auditor to gather sufficient appropriate
evidence about a particular assertion.
 Inspection
 Observation
 Inquiry
 Confirmation
 Computation
 Analytical Procedures
- Audit evidence refers to the information
obtained by the auditor in arriving at the
conclusions on which the audit opinion is
based.
- Audit evidence will comprise source
documents and accounting records
underlying the financial statement and
corroborating information from other
resources.
 Issuing a Report

Completing the Audit

Performing
Substantive Tests
Considering
Internal Control
Audit Planning
Accepting
Engagement
ACCEPTING AN ENGAGEMENT
 The first step in the audit process is
to make a decision of whether to
accept or reject an audit
engagement. This process would
require evaluation of the auditor’s
qualification as well as the auditability
of prospective client’s financial
statement.
The procedures performed at this stage of
the audit are referred to in PSA 300 as
“preliminary planning activities” These
procedures involve:
 Performing procedures regarding the
continuance of the client relationship
and the specific audit engagement.
 Evaluating compliance with ethical
requirements, including independence.
 Establishing an understanding of the
terms of the engagement.
 AUDIT PLANNING
 In
planning an audit, the auditor
must obtained more detailed
knowledge about the client’s
business and industry.
 CONSIDERING INTERNAL
CONTROL
 The auditor should give
adequate consideration to the
entity’s internal control because
the condition of the entity’s
internal control directly affects
the reliability of the financial
statements.
 PERFORMING
SUBSTANTIVE TESTS
The auditor performs
substantive tests to determine
whether the entity’s financial
statements are presented fairly
in accordance with financial
reporting standards.
 COMPLETING THE
AUDIT
 The auditor must have sufficient
appropriate evidence in order to
reach a conclusion on the
fairness of the financial
statements.
 ISSUING A
REPORT
 Thisconclusion (in the form of an
opinion) is communicated to various
interested users through an audit
report.
 ACCEPTING AN ENGAGEMENT
 Inmaking this decision, the firm should
consider:
(1) It’s Competence
(2) It’s Independence
(3) It’s Ability to Serve the Client
Properly
(4) The Integrity of the Prospective
Client’s Management
(1) COMPETENCE
 According to the Code of Ethics,
professional accountants should not
portray themselves as having
expertise which they do not possess.
 Competence is acquired through a
combination of education, training
and experience.
(2) INDEPENDENCE
 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.
 (3) Ability to Serve the Client
Properly
 An engagement should not be accepted
if there are no enough qualified
personnel to perform the audit.
 PSA 220 suggests that audit work should
be assigned to personnel who have the
appropriate capabilities, competence
and time to perform the audit
engagement in accordance with
professional standards.
 (4) Integrity of
Management
 PSA 220 requires the firm to conduct
a background investigation of the
prospective client in order to
minimize the likelihood of association
with the clients whose management
lacks of integrity.
This task would involve:
 Making inquiries of appropriate
parties in the business community
 Communicating with the predecessor
auditor
 Making inquiries of
appropriate parties in the
business community – such as
prospective client’s, banker, legal
counsel or underwriter to obtain
information about the reputation
of the client.
 Communicating with the
Predecessor Auditor
- Communicating with the
predecessor auditor is not
only a matter of courtesy to
the predecessor auditor.
Once permission of the client is
obtained, the incoming auditor should
inquire into matters that may affect the
decision to accept the engagement.
This include questions regarding:
• the predecessor auditor’s
understanding as to the reasons for
the change of auditors.
• Any disagreement between the
predecessor auditor and the client.
• Any facts that might have a bearing
on the integrity of the prospective
client’s management.
RETENTION OF EXISTING CLIENTS
 The auditor’s evaluation of client’s is
not a one-time consideration.
 Clients should be evaluated at least
once a year or upon occurrence of
major events such as changes in
management, directors, ownership,
nature of clients business, or other
changes that may affect the scope of
the examination.
ENGAGEMENT LETTER
 This serve as the written contract between
the auditor and the client. This letter sets
forth:
• The objective of the audit of financial
statements which is to express an opinion on
the financial statements.
• The management’s responsibility for the fair
presentation of the financial statements.
• The scope of the audit
• The forms or any reports or other
communication for the auditor expects to
issue.
 IMPORTANTS OF THE
ENGAGEMENT LETTER
It is in the interest of both the
auditor and the client that the
auditor sends engagement letter
in order to:
• Avoid misunderstandings with
respect to the engagement.
 RECURRING AUDITS
 The auditor does not normally send new
engagement letter ever year. However the
following factors may cause the auditor to
send a new engagement letter.
• Any indication that the client misunderstands
the objective and scope of the audit.
• Any revised or special terms of the
engagement.
 AUDITS OF COMPONENTS
 The auditor should consider the following
factors in making a decision of whether
to send a separate letter to the
component:
• Who appoints the auditor of the component
• Whether a separate audit report is to be
issued on the component
• Legal requirements
• The extent of any work performed by other
auditor.