Question

CASE PROBLEM

You are a new staff member of PA firm Winchester and Churchill, LLP a mid-sized accounting firm. Recently, you were assigned to Jacqueline Petersen, an audit partner. She asked you to complete a preliminary assessment on a potential client and provide a memorandum summarizing your research and a recommendation on the actions the firm should take concerning the potential client. Hint: Specific information on the assignment was provided to you on a separate cover (e. g. profile of the potential client, upper management, and current auditor). As you are playing the role of the new PA, this will be part of your research using your own perception of the profile of the potential client, key executives and governing body of the target company, and the current auditor. You have the option to model either a scenario of accepting or rejecting a prospective client, but not both.

Requirements:

Part A – What factors should you as auditor consider prior to accepting an engagement? Explain.

Part B – List the pre-acceptance procedures and pre-acceptance evaluation that you would perform in assessing the prospective client. Provide an example of audit evidence for each step.

Part C – Whether your recommendation is to accept or reject the engagement of the potential client, identify, and describe at least two of your points in the information to highlight the impact on your professional judgment.

Answer 1

PART A - Factors that auditor should consider prior to accepting an engagement

prior to acceptig a client , the auditor should consider these factors;

1) Management Integrity

Integrity should be evaluated , particularly if the company is controlled by one or few dominant personalities.

2) Risk

Auditor has to evaluate risk level of the client. indicators of risky clients would be ,

for eg: weak / poor accounting systems , rapid turnover of employees particularly in accounting department , lack of finance director etc....

3) Fees and Engagement economies

Auditors should consider audit fee is in accordance with ethical requirements and level of work required (if it is a high risk audit , then they can quote high fees)

4) Relationship with client

5) Ability to perform the work

The audit firm must have the resources to perform the work properly, as well as well as any specialist knowledge or skills.Should also consider timing of the audit.

6) Ethical Requirement

should not create any threats to integrity, objectivity, confidentiality, proffessional behaviour, proffesional co mpetence and due care.

7) Communication with previous auditor

PART B - Pre-acceptance procedures and pre-acceptance evaluation .PART B -  pre-acceptance procedures and pre-acceptance evaluation .

PART B -  pre-acceptance procedures and pre-acceptance evaluation .

i) Before accepting an audit ,the auditor should evaluate whether he or she has ;

• Expertise - (should have knowledge)
• Capacity (Staff, Computers etc)

ii) Auditor should ensure he or she is independent .

make independent enquiries if directors are not personally known

iii) Auditor should avoid conflict of interest .

iv) Auditor should also consider the following;

• Complexity of the clients business .
• Integrity of client's management .
• Internal controls .
• Evidence of fraud or non compliance with laws and regulation.
• Unusual Risks

v) Auditor should also communicate with previous auditor after obtaining permission from client .

enquire whether there are reasons or circumstances behind the change with the new auditors ought to know also as a courtesy

vi) Auditor should ensure that PRECONDITIONS to audit are present ( as per ISA 210).

PART C -

if the auditor is to accept the engagement.

Considering the expertise and capacity requirement - if we have relevant skills , knowledge and resources we can accept for this .

Considering the communication with previous auditor - if we can contact the previous auditor for the inconsistency with client or any isssues with client , if there is no issue or inconsistency , we can accept .

Hope these points will help you , Thanks.