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The Preliminary Audit Engagement, Management Requirements ISA 210 - Coggle…
The Preliminary Audit Engagement
What is the weaknesses in the engagement letter?
(This is what needs to be on an engagement letter)
Inherent limitations
The letter needs to
alert the client
, because of the
inherent limitations of an audit
, together with the
inherent limitations of internal control
, the
unavoidable risk still exists
that some
material misstatements may not be detected
, even though the audit is properly
Remember we sample and do not look at every single transaction so that risk still remains
Auditor independence
We
give an indication of our independence
and assure our clients of our independence requirements to make sure
the users are protected and taken care off
.
Form of any reports or communications
Reportable irregularities
We make sure that the client is aware that we have a duty to report Irregularities in terms of IRBA
Scope
It needs to be mentioned that an audit includes evaluating the
appropriateness of accounting policies
, the
reasonableness of accounting estimates
and overall presentation of the financial statements.
The explanation of why the letter must be signed and returned needs to refer to the acknowledgement of the terms of the engagement.
The letter should indicate that the audit will be performed according to International Standards on Auditing and not in accordance
with generally accepted accounting practices
Management representations
There is needs to be an indication that
written confirmation
of representations of management will be requested.
Management responsibility
Indication needs to be given that management should inform the auditor of any subsequent events.
The letter is needs to be
addressed to the appropriate representative of management
, that is, the
board of directors
or the audit
committee
Indication needs to be given that management should provide the auditors with access to all information and persons necessary to perform the audit.
Management is responsible for compiling the financial statements and it should be mentioned as such in the audit engagement letter.
Weakness in internal control
Indicate to our Client that weaknesses are not our problem, we write write a report if there's a significant deficiency in internal controls
Objective
Auditors do not “certify”; they
give an opinion on fair presentation
It needs to
indicate the year to be audited
.
The letter need to be
dated
Involvement of other parties
Reference need to be made to the use of an expert should this be appropriate.
Disclose that should I not possess the necessary skills then I will get an independant expert who can help me fill any gap
Other services
Also that their own independence is never impaired
If there is a mention of an automated system remember CAATS - Computer-assisted audit techniques.
Name of designated auditor
That's why the designated auditor needs to be identified
The audit will be signed by the designated auditor and not the senior audit manager
Planning and performing the audit
Deadlines
If it is the
first audit
,
imposing a deadline by promising sign-off
of the annual financial statements on a near date
is inappropriate.
Fees
Basing the fees on a similar audit of a previous year, particularly in the case of a first audit, is not an appropriate method of fee charging. Fees should be negotiated with the audit committee based on time, skill and experience.
Auditors Requirements
ISA 220
Accepting a new client:
Four main aspects to be evaluated:
Ethics:
Do any ethical threats exist between the audit firm and the client? (Auditing Notes, chapter 6; ISA 220 para A8).
Competence:
Is the audit firm competent to perform the engagement? (Auditing Notes, chapter 6; ISA 220 para A8; ISQC 1 para A18).
Resource
Time
Capabilities
Significant matters:
Did any such matters arise during the current or previous engagement, the implications of which will affect the continuance of the relationship? (ISA 220 para A8).
Ask previous Auditor
Integrity:
Consider the integrity of the client’s management (Auditing Notes, chapter 6; ISA 220 para A8; ISQC 1 para A19).
Answering Approach
"
Should be
"(Theory)
"
Is
" (Application)
"
So what?
"(Conclusion)
In this case, the Financial Director is waiting until after the audit before she finalizes the AFS
She doesn't seem to be taking full responsibility for the AFS
Management should take full responsibility for preparing financial statements
The financial director says she's waiting for the auditor to finish before she finalises the AFS
Quality control
Leadership responsibilities for quality within
the firm
• Partner responsible for audit engagement
• Must comply with professional standards & issue appropriate audit reports
• Must be an element of quality in all aspects of the audit
Relevant ethical requirements
• Professional ethics (Code))
• Recruit employees who display ethical principles,
• Remain alert for non-compliance and follow up.
• Independence
• Evaluate independence needs for the engagement
• Obtain relevant information to identify possible threats and evaluate
• Take appropriate action to reduce threat (safeguard)
• Always document conclusions on the independence of the team
• Acceptance & continuance of clients
• Procedures to determine:
• Whether clients have integrity
• Whether the engagement is competent to perform the audit
• Whether the firm and the team can comply with an ethical requirement
Obtain information indicate threat, convey information so action can be taken
Engagement team performance
Appropriate capabilities, competence and time
• Experience
• Adhering to professional standards and legal requirements
• Technical knowledge
• Knowledge of industries
• Ability to apply professional judgment
• Understanding of firm’s quality control policies and procedures
Engagement team performance
Team should be properly:
Reviewed – performed in accordance with standards, significant matters addressed, appropriate consultations occurred, changing of audit plan / work, work performed supports conclusions reached, objectives audit achieved
Supervised – monitoring progress, enough time available, understanding their instructions, addressing the issues, identifying matters requiring consultation
Directed – responsibilities, nature of business, risk issues and problems, detailed audit strategy and plan
• Consultation & differences of opinion
Document nature / scope / conclusions resulting from consultations
Confirm that consultations are implemented
Issues resolved
Differences of opinion settled through arbitration
Engagement quality control review
Consider independence, risks and responses, judgments made, outcome of consultations, treatment of misstatements, issues communicated to management, documentation supports conclusions, appropriate audit report issued
Objectively review significant judgments within auditors report
Monitoring
They need to be relevant, adequate, operating
effectively and complied with in practice.
No point having policies unless they are checked to ensure they are operating effectively
Management Requirements
ISA 210
Is the Reporting Framework Acceptable
Management must accept their responsibility for
Internal Controls needed for for financial reporting
Providing access to information and people the auditor may need
The preparation of AFS