Question

1. Describe the procedures that an auditor should perform when deciding whether or not to take on a new client.

2. What is the purpose of the engagement letter?

3. Consider the following statement: When inherent and control risk are assessed as high, the risk of material misstatement is assessed as high, and an auditor will set detection risk as low to reduce audit risk to an acceptably low level. Explain what it means to set detection risk as low. What does this mean for the operation of the audit?

Answer 1

1)POINTS TO BE CONSIDERED WHILE ACCEPTING A NEW AUDIT:

a)The integrity of the key managment and those charged with governance.

b) whether the engagement team has necessary capabilities and competent to perform the audit engagement.

c) whether the engagement team can comply with ethical requirements.

d) significant matters that have arisen during previous audit engagement.

If the auditor is satisfied with above points then he can accept the audit.

2.PURPOSE OF ENGAGEMENT LETTER:

✓The letter details the scope of the agreement, its terms, and costs.

✓The purpose of an engagement letter is to set expectations on both sides of the agreement.

✓The letter is intended to briefly but accurately describe the services to be delivered, the terms and conditions, the deadline or deadlines, and the compensation.

✓ A letter of engagement is a legal document and binding in a business deal.

DETECTION RISK:

The risk that Audit procedure performed will not detect a material misstatements.

✓ Detection risk has inverse relationship with both inherent risk and control risks.

✓ If control risk and inherent risk are more then auditor conducts audit in depth resultantly he detects mms and failure to detect mms decreases automatically detection risk will be low.