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You have received a request form XYZ Ltd. to accept an appointment as their auditor for the financial year ending 31 December 2001

      

You have received a request form XYZ Ltd. to accept an appointment as their auditor for the financial year ending 31 December 2001
Required:
a) Explain the preliminary procedures you would carry out upon your appointment.
b) What is the importance of a preliminary review?
c) Why is it important for the auditor to hold discussions with the client‘s senior staff?
d) State why it is important for an incoming auditor to hold consultations with the outgoing auditor.

  

Answers


Wilfred
(a) The steps I would take after appointment at the AGM include: -
1) I would obtain instructions from the client as to the scope of the work and whether this is in addition to what is assigned to me by the Company‘s Act in which case it should be put or referred to in a letter of engagement.
2) Considered whether my appointment was legally carried out as per the requirements of the company‘s Act. In particular I would obtain a copy of the resolution passed at the AGM appointing my firm as the auditors of the
company.
3) I would issue a letter of engagement to the client. This letter would serve the purpose of defining the scope of my audit work and as a formal acceptance of the audit work.
4) I would seek for background information about the client. This would include the nature of its business, the owners of the company and its financial information. Such information will assist in evaluating the potential risk in associating with the client and also in planning the approach to be adopted in carrying out the work.


b) A preliminary review is important as it helps the audit firm to screen out potentially risky audit clients and also identify any factors that could affect the nature of the work to be performed and also the approach to be adopted by the auditor.
The considerations which are relevant in deciding whether a client is a high risk include:-
- evidence of client engagement in fraudulent or illegal activities
- the state of the economic sector in which the client operates (a depressed sector may indicate risk)
- the nature of the industry and the clients product lines
- the clients previous audit history (frequent changes of auditors, and/or qualified reports are indicators of high risk clients)
- The general abilities of the client management
- Understanding of the directors of their own role and that of the auditor
- Evidence of management intentionally failing to record a material transaction.

(c) It is important for an auditor to hold discussions with the clients senior staff in order to:-
1) Agree on the terms of engagement which clearly state and specify the scope of the audit.
2) Determine any changes that have taken place in the client entity such as:-
- changes in accounting policies used
- changes in senior management
- changes in product lines.
3) To ensure management clearly understand their responsibilities especially in regards to preparing financial statements that show a true and fair view.
4) To obtain as much information as possible about the client e.g, the current trading circumstances the reliability of the accounting and internal control system which will help the auditor in formulating an appropriate approach for the conduct of the audit.

(d) It is important for an incoming auditor to hold consultations with the outgoing auditor because: -
i) It is a matter of professional courtesy
ii) To enable him to obtain all the pertinent matters relevant to the audit from the outgoing auditors. This includes issues which would influence his decision as to whether or not to accept the appointment. The outgoing auditor will be able to provide information such as the reasons behind their removal as auditors of the company. Scuh information will be useful in deciding whether to accept the appointment or to decline.
Wilfykil answered the question on February 21, 2019 at 11:28


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