Client Acceptance

■ Audit Clients

    The client – audit firm relationship is not a one-way street where the audit firm evaluates
the client and then, judging the client “acceptable”, sends out an engagement letter
closing the deal. The market for audit services is competitive and, just like in any other
business, there are highly desirable clients with whom any audit firm would like to have
an audit relationship. Although not always the case, audit firms prepare and submit
engagement proposals to many of their (potential) clients, especially the large ones.

Client Acceptance Phase Objectives

·         Examination of the proposed client to determine If there is any reason to reject the engagement (acceptance OF the client) and convincing the client to hire the auditor (acceptance BY the client)

·         Decide on acquiring a new client or continuation of the relationship with and existing client

·         Determine the type and amount of staff

 

Client Acceptance Procedures

·         Evaluate the clients background and reasons for the audit.

·         Determine whether the auditor is able to meet the ethical requirements regarding the client.

·         Determine need for other professionals.

·         Communicate with predecessor auditor.

·         Prepare client proposal.

·         Select staff to perform the audit.

·         Obtain an engagement letter.

Knowledge of a Client‘s Business Helps

Auditors

·         to evaluate the engagement risks associated with accepting the specific engagement and

·         to help the auditor in determining whether all professional and ethical requirements (including independence, competence, etc.) regarding this client can be met.

 

 

New Client Review

·         publicly available information,

·         past company financial statements,

·         reports to stockholders,

·         government financial reports company premises via tour

·         previous auditor relationship

 

When using an expert‘s work the auditor

MUST :                    

 

·         Determine expert‘s

·         Competence (professional certifications)

·         Capabilities

·         Objectivity

·         The auditor shall agree, in writing when appropriate, with the auditor‘s expert:

·         The nature, scope and objectives of that expert‘s work

·         The respective roles and responsibilities of the auditor and that expert

·         The nature, timing and extent of communication

·         The need for the auditor‘s expert to observe Confidentiality

 

Reference to the Auditor’s Expert in the Auditor’s Report

·         The auditor shall not refer to the work of an auditor‘s expert in an auditor‘s report containing an unmodified (unqualified) opinion unless required by law or regulation to do so.

·         If the auditor makes reference to the work of an auditor‘s expert in the auditor‘s report because such reference is relevant to an understanding of a modification to the auditor‘s opinion, the auditor shall indicate in the auditor‘s report that such reference does not reduce the auditor‘s responsibility for that opinion.

 

Prior Auditor- First Time Engagements

·         IESBA Code of Ethics recommends that the new auditor communicate directly with the previous auditor.

·         The proposed accountant should request permission from the client to communicate with existing accountant.

·         When the prior accountant receives the communication, he should ordinarily reply advising of any reasons why the proposed accountant should not accept the appointment.

·         First time engagements require evidence that opening balances are not misstated, prior balances are correctly brought forward, and proper accounting applied.

 

Continuing Client Audit Proposal

·         A review on how the auditing

·         firm can add value

·         Plans for further improvement

·         in value added

·         A description of the audit team

·         Fee proposal

New Client Audit Proposal

       An executive summary

      The executive summary gives a brief summary of the proposal with special emphasis

on client expectation, audit approach, firm selling points and co-ordination of the audit

with staff internal auditors.

·         Client‘s business and audit expectations

      The general proposal may begin with a description of client business sectors, technology, financial strengths and divisions. The client’s objectives as the basis of the audit strategy21 could be outlined. It may point out audit requirements relating to securities exchange, environmental, governmental and other regulations, including items in the company’s policies that go beyond existing statutory requirements.

·         Strengths of the audit firm

      Strengths of the audit firm may explore client service attitudes, technical competency,

experience, desire to exceed expectations, and advice and assistance. This section

might also emphasize report quality, continuity of audit teams, worldwide service, cost

effectiveness of audits, and audit firm’s quality standards.

·         Audit team

      The audit team section includes a description of members of the team and a summary

of their work experience. This section might also detail how the team will communicate

      with management, the role of the team and supervisors, and team meetings and communications.Choosing the audit team is Step 6 in the client acceptance process and is generally done well ahead of writing the client proposal.

·         Audit approach

      The audit approach is an important section because it allows a discussion of how the

      audit is tailored to this one, specific client. The section could explain audit emphasis or

      concentration on specific audit risks, the use of information technology on the audit, the

      involvement of other auditors or experts, and the number of locations or components

      reviewed. The section could address terms of the engagement, any statutory responsibilities,and internal control and client systems. The nature and timing of reports or other communications (e.g., audit opinion, review, special procedures, governmental reporting, oral and written reports to the audit committee) expected under the engagement is also important.

·         Client‘s internal auditors

      The client’s internal auditors’ work22 must be relied upon to a certain extent in all

      audits. This section may include reference to the internal auditors’ work and production,

      supplier selection, and supplier failure. Other issues explored may include safeguarding of assets, internal controls, management information systems, systems security, adherence to corporate policy, due diligence reviews, and opportunities for improvement

·         Transition needs

      A discussion of the transition needs of the company in terms of accommodating the new auditor may be very important in convincing a new client to switch auditors. This section of the proposal might include a transition schedule detailing meetings with management and former auditors. Other areas addressed might include permanent file documentation, understanding of internal control, and benefits of the change.

·         Other services of the audit firm

·         After service monitoring

      After the audit is complete there are still opportunities for the auditor to offer service to the client. These after-service monitoring activities may include monitoring the audit performance, audit firm self-evaluation (usually at closing meetings), questionnaires for management to evaluate the audit performance, and written summaries of what was done in the audit (i.e. audit and satisfaction survey) can be given to the client.

·         Fee details

·         Appendix

      An appendix might include further information about the audit team, an outline of the audit plan and a list of representative publications. The outline of the audit plan usually shows the degree of audit time required for fieldwork, confirmation of controls, validation of balances and transactions. In particular, the outline of the audit plan will provide an overview of the audit risks, and the auditor’s suggested response to those risks, in the form of detailed audit procedures.

        

The agreed terms of the audit engagement shall be recorded in an audit engagement letter or other suitable form of written agreement and shall include:

(a) The objective and scope of the audit;

(b) The responsibilities of the auditor;

(c) The responsibilities of management;

(d) Identification of the applicable financial reporting framework; and

(e) Reference to the expected form and content of any reports to be issued by the auditor and a statement that there may be circumstances in which a report may differ from its expected form

and content.

Generally the Engagement Letter Should Also, Include :

·         Access to all information of which management is aware that is relevant to the preparation of the financial statements such as records, documentation and other matters;

·         Additional information that the auditor may request from management for the purpose of the audit; and

·         Unrestricted access to persons within the entity from whom the auditor determines it necessary to obtain audit evidence.