Question

Question 3

John Lee is the manager in charge of the audit of the upcoming annual audit of Hing Fat Ltd, a new audit client. All the preliminary verbal discussions and enquiries among the auditors, the company, the predecessor auditor and all other necessary parties have been completed. John will supervise two audit assistants on the engagement and willvisit the client again before the audit eldwork begins.

John has established an understanding with the Head of Internal Audit on the assistance to be provided by the internal audit department and is now drafting the engagement letter.

Required

a List the items that should be included in a typical engagement letter in these circumstances.

b Explain the bene ts derived from preparing an engagement letter.

c Discuss eight planning activities that John Lee still needs to complete.

Answer 1

SA 210 -THIS STANDARD ON AUDITING DEALS WITH THE AUDITOR'S RESPONSIBILITY IN AGREEING THE TERMS OF THE AUDIT ENGAEMENT WITH MANAGEMENT AND ,WHERE APPROPRIATE,THOSE CHARGED WITH GOVERNANCE .

THE OBJECTIVE OF THE AUDITOR IS TO ACCEPT OR CONTINUE AN AUDIT ENGAGEMENT ONLY WHEN THE BASIS UPON WHICH IT IS TO BE PERFORMED HAS BEEN AGREED,THOUGH:

A)ESTABLISHING WETHER THE PRECONDITIONS FOR AN AUDIT ARE PRESSENT;AND

B)CONFIRMING THAT THERE IS A COMMON UNDERSTANDING BETWEEN THE AUDITOR AND MANAGEMENT AND,WHERE APPROPRIATE,THOSE CHARGED WITH GOVERNANCE OF THE TERMS OF THE AUDIT ENGAGEMENT.

MAIN ANSWER( A)ITEMS TO BE INCLUDED -

1)THE OBJECTIVE AND SCOPE OF THE AUDIT OF THE FINANCIAL STATEMENTS;

2)THE RESPONSIBILITIES OF THE AUDITOR;

3)THE RESPONSIBILITIES OF MANAGEMENT;

4)IDENTIFICATION OF THE APPLICABLE FRF FOR THE PREPARATION OF THE FINANCIAL STATEMENTS;AND

5)REFERENCE TO THE EXPECTED FROM AND CONTENT OF ANY REPORTS TO BE ISSUED BY THE AUDITOR AND A STATEMENT THAT THERE MAY BE CIRCUMSTENCES IN WHICH A REPORT MAY DIFFER FROM ITS EXPECTED FORM AND CONTENT.

B)BENEFIT

1)MANAGEMENT AND AUDITORREMAIN AWARE ABOUT THE NATURE ,EXTENT AND TIME OF AUDIT TO BE CONDUCTED BY AUDITOR;

2)AUDITOR REMAINS AWARE ABOUT HIS TERMS AND CONDITIONS;

3)IT CREATES MUTUAL UNDERSTANDING.

4)COMPLETION OF AUDIT IN A SUCCESSFUL MANNER WITHOUT ANY CONFUSION BETWEEN MANAGEMENT AND AUDITOR.

C)PLANING ACTIVITIES-

1)ACCEPT THE CLIENT AND PERFORM INITIAL AUDIT PLANNING

2)UNDERSTAND THE CLIENT'S BUSINESS AND INDUSTRY

3)ASSESS CLIENT BUSINESS RISK

4)PERFORM PRELIMI NARY ANALYTICAL PROCEDURES

5)SET MATERIALITY AND ASSESS ACCEPTABLE AUDIT RISK AND INHERENT RISK

6)UNDERSTAND INTERNAL CONTROL AND ASSESS CONTROL RISK

7)GATHER INFORMATION TO ASSESS FRAUD RISKS

8)DEVELOP OVERALL AUDIT PLAN AND PROGRAM.