AT.1807-Preliminary-Engagement-Activities-1.pdf

Since 1977

AUDITING THEORY AT.1807-Preliminary Engagement Activities

L. R. CABARLES OCTOBER 2013

LECTURE NOTES Preliminary Engagement Activities During this phase of audit, the auditor shall undertake the following activities:  Performing procedures regarding the acceptance of the client relationship and the specific audit engagement;  Establishing preconditions for an audit;  Agreeing the terms of the engagement; and  Communicating with the predecessor auditor, if applicable. Client Acceptance and Continuance

The following are the management’s responsibilities, which constitute the premise on which the audit is conducted:  Preparation and presentation of the financial statements  Design, implementation and monitoring of internal control to financial statements  To provide the auditor with: o Access to all information relevant to audit o Additional information the auditor may request o Unrestricted access to persons within the entity Limitation on Scope Prior to Audit Engagement Acceptance The auditor shall not accept an audit engagement, if management or those charged with governance imposes a limitation on the scope of work that will result to disclaimer of opinion unless required by law or regulation to do so.

ar stu ed d y vi re aC s o ou urc rs e eH w er as o. co m

As discussed in “Quality Controls”, the auditor shall only undertake or continue audit engagement where the auditor:  is competent to perform the engagement and has the capabilities, time and resources to do so;  complies with relevant ethical requirements; and  considers the integrity of the client. Basis of Audit Engagement

In addition, the auditor shall accept or continue an audit engagement only when the basis of audit engagement has been agreed, through:  Establishing preconditions for an audit; and  Confirming common understanding between the auditor and management and, where appropriate, those charged with governance (TCWG) on the terms of the audit engagement. Preconditions for an Audit

The auditor shall establish the presence of the preconditions for an audit by:  determining that the financial reporting framework (FRF) is acceptable and is available to intended user applied to FSs; and  obtaining the agreement of management regarding its responsibility and, where appropriate, TCWG to the premise on which an audit is conducted.

Agreement on Audit Engagement Terms After the auditor has decided to accept or continue an audit engagement, the auditor and the client should agree the terms of the engagement, preferably through the audit committee, if any. The agreed terms need to be recorded in an audit engagement letter or other suitable form of contract. Audit engagement letter is a written terms of an engagement in the form of a letter by the auditor to the client. An engagement letter documents and confirms the auditor’s acceptance of the appointment. It is in the interest of both the client and the auditor that the auditor sends the engagement letter, preferably before the commencement of the audit to help avoid misunderstandings with respect to the engagement. Contents of the Audit Engagement Letter Primary Content of the Audit Engagement Letter

Acceptable Financial Reporting Framework

Additional Contents of the Audit Engagement Letter

A financial reporting framework is the benchmark or criteria in an audit. As discussed under the framework of assurance engagements, criteria must be suitable to be considered acceptable.

Engagement letter may additionally include:  Elaboration of the scope of the audit  The form of any other communication of results of the audit  Audit and internal control inherent limitations  Planning and performance of the audit, including the composition of the audit team  Written representations from management  Draft financial statements from management  Audit fees, including computation and billing  Acknowledgement from management  Involvement of other auditors and experts  Involvement of internal auditors and other staff  Arrangements with the predecessor auditor  Any restriction of the auditor’s liability  Further agreements between the auditor and the entity

sh

Th

is

If the preconditions are not present, the auditor shall discuss the matter with management, if not resolved, the auditor should not accept the engagement unless required by law or regulation.

Engagement letter primarily includes:  The objective and scope of the audit;  The responsibilities of the auditor;  The responsibilities of management;  Identification of the applicable FRF; and  Reference to form and content of audit reports and statement regarding deviation from form and content, in certain circumstances.

In an audit of historical financial statements, the FRF used is generally the GAAP. In the Philippines, the following are the acceptable FRF depending on the type of client: a. The Full Philippine Financial Reporting Standards (PFRSs) b. The PFRS for Small and Medium-sized entities (SMEs) c. Other acceptable basis of reporting Management’s Responsibilities

https://www.coursehero.com/file/14402585/AT1807-Preliminary-Engagement-Activitiespdf/

Page 1 of 7

www.prtc.com.ph

AT.1507

EXCEL PROFESSIONAL SERVICES, INC. 

Any obligations to provide audit working papers to other parties Audit Fees, Computation and Billing The requirement for fees charged should be reflective of the fair value of the work performed and to be performed, and should take into account the following, among others: a. The skill and knowledge required for the type of work involved; b. The level of training and experience of the persons engaged on the work; c. The time necessarily consumed by personnel engaged on the work; and d. The degree of responsibility assumed and urgency that the work entails. The mere fact that the fees charged to the client is lower than that of normally quoted by another auditor is not in itself unethical. The typical billing methods used by the auditor are:

Retainer’s fee basis

The client is billed a lump sum and allinclusive amount for the engagement. Billing is done on the basis of actual time spent by the staff multiplied by the rates/hour agreed upon. The client is charged on a per diem basis, but will not exceed up to a certain maximum amount. The client is billed a fixed fee periodically for the services rendered during a designated period of time, either on a monthly, semi-annually or annual basis.



a misunderstanding as to the nature of an audit as originally requested; or a restriction on the scope of the audit engagement, whether imposed by management or caused by other circumstances.

The auditor considers the justification given for the request, particularly the implications of a restriction on the scope of the audit engagement. Request to Change to a Review or a Related Service If, prior to completing the audit engagement, the auditor is requested to change the audit engagement to an engagement that conveys a lower level of assurance, the auditor shall determine whether there is reasonable justification for doing so considering any legal or contractual implications of the change. If the change is justifiable, record the new terms in a new engagement letter. The new report should not include reference to:  the original audit engagement; and  any procedures performed in the audit engagement, except if changed to an agreed-upon procedures

ar stu ed d y vi re aC s o ou urc rs e eH w er as o. co m

Fixed or flat fee basis Actual time charges (Per Diem) basis Maximum fee basis



Audits of Components

Declining a Change in Engagement

The auditor shall not agree to a change of engagement where there is no reasonable justification for doing so. An example might be a restriction on the scope of the audit engagement where the auditor is unable to obtain sufficient appropriate audit evidence regarding receivables and the entity asks for the audit engagement to be changed to a review engagement to avoid a qualified opinion or a disclaimer of opinion. If the auditor is unable to agree to a change of the terms of the audit engagement and is not permitted by management to continue the original audit engagement, the auditor shall:  withdraw from the audit engagement (unless required by law or regulation); and  determine whether there is any obligation to report to other parties, such as those charged with governance, owners or regulators.

Recurring Audits

For prospective clients that have previously been audited by another CPA firm, the new (successor) auditor is required, under the code of ethics, to communicate with the predecessor auditor is to help the successor auditor evaluate whether to accept the engagement.

is

When the auditor of a parent entity is also the auditor of a component, the following factors are considered whether to send a separate engagement letter to the component:  Who appoints the component auditor;  Whether a separate auditor’s report is to be issued on the component;  Legal requirements in relation to audit appointments;  Degree of ownership by parent; and  Degree of independence of the component management from the parent entity.

sh

Th

New engagement letter may not be sent annually to the same client. However, the auditor should consider the following factors when sending new engagement letter:  Misunderstanding of the objective and scope  Any revised or special terms  A recent change of senior management  A significant change in ownership  A significant change in entity’s nature or size  A change in legal or regulatory requirements  A change in the financial reporting framework  A change in other reporting requirements Acceptance of a Change in the Terms of the Audit Engagement Request to Change the Terms of the Audit Engagement

The auditor shall not agree to a change in the terms of the audit engagement where there is no reasonable justification for doing so. A request from the entity for the auditor to change the terms of the audit engagement may result from:  a change in circumstances affecting the need for the service;

Communication with Predecessor Auditor

The burden of initiating the communication rests with the successor auditor. However, confidentiality requires that the predecessor auditor obtain permission from the client before the communication can be made. The successor auditor normally inquires the following from the predecessor auditor about the prospective client:  Integrity of management  Disagreements with management about audit procedures or accounting principles  Communication with Audit Committee about fraud, illegal acts, or internal control  Reason for change in auditor If a client will not permit the communication or the predecessor will not provide a comprehensive response, the successor should seriously consider the acceptability of a prospective engagement, without considerable other investigation.

https://www.coursehero.com/file/14402585/AT1807-Preliminary-Engagement-Activitiespdf/

Page 2 of 7

www.prtc.com.ph

AT.1507

EXCEL PROFESSIONAL SERVICES, INC.

Example of an Audit Engagement Letter To the appropriate representative of management or those charged with governance of ABC Company [The objective and scope of the audit] You have requested that we audit the financial statements of ABC Company, which comprise the balance sheet as at December 31, 2013, and the income statement, statement of changes in equity and cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory information. We are pleased to confirm our acceptance and our understanding of this audit engagement by means of this letter. Our audit will be conducted with the objective of our expressing an opinion on the financial statements. [The responsibilities of the auditor]

Because of the inherent limitations of an audit, together with the inherent limitations of internal control, there is an unavoidable risk that some material misstatements may not be detected, even though the audit is properly planned and performed in accordance with PSAs.

is

In making our risk assessments, we consider internal control relevant to the entity’s preparation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. However, we will communicate to you in writing concerning any significant deficiencies in internal control relevant to the audit of the financial statements that we have identified during the audit.

sh

Th

As part of our audit process, we will request from [management and, where appropriate, those charged with governance], written confirmation concerning representations made to us in connection with the audit.

ar stu ed d y vi re aC s o ou urc rs e eH w er as o. co m

We will conduct our audit in accordance with Philippine Standards on Auditing (PSAs). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

Our audit will be conducted on the basis that [management and, where appropriate, those charged with governance] acknowledge and understand that they have responsibility: (a) For the preparation and fair presentation of the financial statements in accordance with Philippine Financial Reporting Standards; (b) For such internal control as [management] determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; and (c) To provide us with: (i) 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; (ii) Additional information that we may request from [management] for the purpose of the audit; and (iii) Unrestricted access to persons within the entity from whom we determine it necessary to obtain audit evidence.

We look forward to full cooperation from your staff during our audit. [Other relevant information] [Insert other information, such as fee arrangements, billings and other specific terms, as appropriate.] [Reporting] [Insert appropriate reference to the expected form and content of the auditor’s report.] The form and content of our report may need to be amended in the light of our audit findings. Please sign and return the attached copy of this letter to indicate your acknowledgement of, and agreement with, the arrangements for our audit of the financial statements including our respective responsibilities. XYZ & Co.

Acknowledged and agreed on behalf of ABC Company by (signed) ...................... Name and Title Date - done -

MULTIPLE CHOICE

1. Which of the following would an auditor least likely perform as part of the auditor’s preliminary engagement activities or pre-planning or preengagement phase? a. Perform procedures regarding the continuance of the client relationship and specific engagement. b. Evaluate compliance with ethical requirements, including independence. c. Establish an understanding of the terms of the engagement. d. Obtain understanding of the legal and regulatory framework applicable to the entity.

2. In making a decision to accept or continue with a client, the auditor should consider: a. b. c. d. Its competence Yes Yes Yes Yes Its independence Yes No Yes No Its ability to serve the client Yes Yes Yes No properly The integrity of client’s Yes Yes No Yes management That understanding of the Yes No Yes No terms of engagement has been obtained with the management

https://www.coursehero.com/file/14402585/AT1807-Preliminary-Engagement-Activitiespdf/

Page 3 of 7

www.prtc.com.ph

AT.1507

EXCEL PROFESSIONAL SERVICES, INC. 3. The use by management of an acceptable financial reporting framework in the preparation of the financial statements and the agreement of management and, where appropriate, those charged with governance to the premise on which an audit is conducted. a. Terms of audit engagement b. Preconditions for the audit c. Scope of the audit d. FS Audit 4. If management or those charged with governance impose a limitation on the scope of the auditor’s work in the terms of a proposed audit engagement such that the auditor believes the limitation will result in the auditor disclaiming an opinion on the financial statements, the auditor shall not accept such a limited engagement as an audit engagement, unless required by law or regulation to do so.

5. Preliminary arrangements agreed to by the auditor and the audit client should be reduced to writing by the auditor. The best place to set forth these arrangements is in a. A memorandum to be placed in the permanent section of the auditing working papers. b. An audit engagement letter. c. A client representation letter. d. A confirmation letter attached to the constructive services letter.

Th

is

6. Engagement letters are widely used in practice for professional engagements for all types. The primary purpose of the engagement letters is to a. Remind management that the primary responsibility for the financial statements rests with management b. Provide a written record of the agreement with the client as to the services to be provided c. Satisfy the requirements of the CPA’s liability for insurance policy d. Provide a starting point for the auditor’s preparation of the preliminary audit program

sh

7. When should an auditor obtain an engagement letter? a. Whenever a prospective client offers to hire the audit firm b. During the interim audit period, after the auditor has evaluated the client’s internal control and estimated the amount of time required for the audit c. When a new client is accepted by the auditor d. At the conclusion of the field work, just prior to signing the audit report

8. It is in the interest of both client and auditor that the auditor sends an audit engagement letter, preferably before a. The performance of substantive testing. b. The commencement of the engagement. c. The completion of audit. d. Before the issuance of audit report. 9. Which of the following normally signs the engagement letter for an audit of a public company? a. Corporate treasurer.

10. The form and content of audit engagement letters may vary for each client, but they would generally include reference to the following, except a. The objective of the audit of financial statements. b. Auditor’s responsibility for the financial statements. c. The form of any reports or other communication of results of the engagement. d. Unrestricted access to whatever records, documentation and other information requested in connection with the audit. 11. Which of the following is not included in an engagement letter? a. Restriction on cash balances, lines of credit by similar arrangements b. Accessibility to all financial records c. Client imposed limitation in the scope d. Limitation in the scope of examination as imposed by circumstances 12. Before performing any audit procedures. The auditor and the client should agree on the Type of opinion to be Terms of the expressed engagement a. Yes Yes b. No Yes c. No Yes d. Yes Yes 13. In determining audit fees, an auditor may take into account each of the following except a. Volume and intricacy of work involved. b. Degree of responsibility assumed. c. Number and cost of manhours needed. d. Size and amount of capital of client. 14. Retainer’s fee basis is when a. Billing is done on the basis of actual time spent at the agreed rates/hour. b. The client is charged on a per diem basis with a cap or ceiling amount. c. The client is billed a fixed fee periodically for the services rendered during a designated period of time. d. The client is billed at a single amount for the entire engagement. 15. A type of billing audit client which combines lump sum and per diem methods is known as a. Retainer’s fee basis b. Maximum fee basis c. Either (a) and (b) above d. None of the above 16. Which of the following factors do not influence the decision of the auditor to send a separate engagement letter to the parent entity and its component (subsidiary, branch or division) assuming the same auditor handles both entities? a. legal requirements b. degree of ownership by parent c. ethical requirements d. whether a separate audit report is to be issued on the component 17. Assuming a recurring audit, in which of the following situations would the auditor be unlikely to send a new engagement letter to the client?

https://www.coursehero.com/file/14402585/AT1807-Preliminary-Engagement-Activitiespdf/

Page 4 of 7

Chief financial officer. Chairman of the board of directors. Audit committee.

ar stu ed d y vi re aC s o ou urc rs e eH w er as o. co m

The auditor shall agree the terms of the audit engagement with management or those charged with governance, as appropriate. a. True, True b. True, False c. False, False d. False, True

b. c. d.

www.prtc.com.ph

AT.1507

EXCEL PROFESSIONAL SERVICES, INC. a. b. c. d.

A recent change in partner and/or staff involved in the audit engagement. A change in the terms of engagement. A recent change of client management. A significant change in the nature or size of the client's business.

18. On recurring audits, the auditor may decide not to send a new engagement letter each year. However, he might decide to send a new letter when: a. Any indication that the entity misunderstands the objective and scope of the audit. B A change in the financial reporting framework adopted in the preparation of the financial statements or other reporting requirements c. A significant change in ownership d. All of the above

20. Which of the following would ordinarily be considered a reasonable basis for requesting a change in the engagement a. a change in circumstances. b. a misunderstanding as to the nature of the audit. c. a restriction on the scope of the engagement, whether imposed by management or caused by circumstances. d. Both a and b 21. The auditor should not agree for a change of engagement when there is no reasonable justification for doing so.

is

If the auditor is unable to agree to a change of the engagement and is not permitted to continue the original engagement, this will have an effect on the auditor’s report. a. True, False c. True, True b. False, False d. False, True

sh

Th

22. Which of the following actions may be appropriate if the auditor is unable to agree to a change of the engagement and is not permitted to continue the original engagement? I. Auditor should withdraw from the engagement II. Consider whether there is any obligation to report to the board of directors or shareholders the circumstances necessitating withdrawal a. I c. II b. I, II d. Neither I nor II 23. In audit situation, communication between successor and predecessor auditors should be a. authorized in an engagement letter b. acknowledged in a representation letter c. either written or oral d. written and included in the working papers 24. Pedro, CPA, is succeeding Maria, CPA, on the audit of Peta Manufacturing, Inc. Pedro plans to consult Maria and to review Maria’s prior year working papers. Pedro may do so if a. Maria consents b. Peta Manufacturing, Inc. consents

25. Prior to the acceptance of an audit engagement with a client who has terminated the services of the predecessor auditor, the CPA should a. Contact the predecessor auditor without advising the prospective client and request a complete report of the circumstances leading to the termination with the understanding that all information disclosed will be kept confidential. b. Accept the engagement without contacting the predecessor auditor since the CPA will include procedures to verify the reason given by the client for termination. c. Not communicate with the predecessor auditor because this would in effect be asking the auditor to provide the confidential relationship between the auditor and client. d. Advise the client of the intention to contact the predecessor auditor and request permission for the contact. 26. Which of the following will an auditor most likely discuss with the former auditors of a potential client prior to acceptance? a. Integrity of management. b. Reasons for changing audit firms. c. Disagreements with management regarding accounting principles. d. All of the above must be discussed. 27. Janie Jones, CPA is proposing on a prospective audit engagement for White Mountain Enterprises. After obtaining written permission of White Mountain, Janie is required to perform what procedure prior to accepting it as a new client? a. Provide full disclosure of fees that will be billed to White Mountain. b. Contact the former auditor to ensure all disagreements have been resolved. c. Contact the former auditor about certain matters of interest in Janie’s decision to accept White Mountain as a client. d. Contact the former auditor to determine if all fees have been paid, the change in auditors have been approved and integrity issues have been overcome. 28. An incoming auditor should request the new client to authorize the predecessor auditor to allow a review of the predecessor ‘s Engagement letter Working paper a. Yes Yes b. Yes No c. No Yes d. No No 29. Which of the following factors most likely would cause an auditor not to accept a new audit engagement? a. An inadequate understanding of the entity’s internal control structure. b. The close proximity to the end of the entity’s fiscal year. c. Concluding that the entity’s management probably lacks integrity. d. An inability to perform preliminary analytical procedures before assessing control risk. 30. The auditor will utilize many resources to assess management integrity in the client acceptance process. Which of the following will an auditor most likely refrain from using in this search?

https://www.coursehero.com/file/14402585/AT1807-Preliminary-Engagement-Activitiespdf/

Page 5 of 7

Maria and Peta Manufacturing, Inc. consent Maria and Pedro consent

ar stu ed d y vi re aC s o ou urc rs e eH w er as o. co m

19. When a change in the type of engagement from higher to lower level of assurance is reasonably justified, the report based on the revised engagement a. Should not contain a separate paragraph that refers to the original engagement. b. Should not refer to any procedures that may have been performed in the original engagement. c. Omits reference to the original engagement. d. All of the above

c. d.

www.prtc.com.ph

AT.1507

EXCEL PROFESSIONAL SERVICES, INC. a. b. c.

Predecessor auditor. Other professionals in the business community. Public databases.

d.

All of the above will typically be used by an auditor in the search. - now do the DIY drill -

DO-IT-YOURSELF (DIY) DRILL 1. Before accepting an engagement to audit a new client, a CPA is required to obtain a. A preliminary understanding of the prospective client’s industry and business. b. The prospective client’s signature to the engagement letter. c. An understanding of the prospective client’s control environment. d. A representation letter from the prospective client.

7. The following are the reasons why the auditor will send a new engagement letter each period, except a. Any revised or special terms of the engagement b. A recent change in the audit team c. A significant change in nature or size of the client’s business d. Legal requirements 8. 1st statement – Where the terms of the engagement are changed, the auditor and the client should agree on the new terms. 2nd statement – The auditor should not agree to a change of engagement when there is no reasonable justification for doing so. 3rd statement – If management or those charged with governance impose a limitation on the scope of the auditor’s work in the terms of a proposed audit engagement such that the auditor believes the limitation will result in the auditor disclaiming an opinion on the financial statements, the auditor shall not accept such a limited engagement as an audit engagement, unless required by law or regulation to do so. a. 1st and 2nd statements are correct; 3rd statement is incorrect. b. 1st and 3rd statements are correct; 2nd statement is incorrect. c. 2nd and 3rd statements are correct; 1st statement is incorrect. d. All statements are correct.

3. Which of the following is not included in an engagement letter? a. Limitation in the scope of examination as imposed by client b. Limitation in the scope of examination as imposed by circumstances c. Restrictions on auditor’s liability, when such possibility exists d. Satisfactory title to assets, liens on assets and assets pledged

Th

is

4. The following matters are generally included in an auditor’s engagement letter, except a. Management’s responsibility for the financial statements b. The scope of the audit c. The fact that because of the test nature and other inherent limitations of the audit, together with the inherent limitations of internal control, there is an unavoidable risk that even some material misstatements may remain undiscovered. d. The factors to be considered in setting preliminary judgments about materiality

sh

5. Which of the following matters is generally included in auditor's engagement letter? a. Management's responsibility for the entity's compliance with laws and regulations. b. The factors to be considered in setting preliminary judgments about materiality. c. Management's liability for illegal acts committed by its employees. d. The auditor's responsibility to search for significant internal control deficiencies. 6. An audit engagement letter least likely includes a. A reference to the inherent limitation of an audit that some material misstatements may remain undiscovered. b. Identification of specific audit procedures that the auditor needs to undertake. c. Description of any letters or reports that the auditor expects to submit to the client.

9. Which of the following is(are) proper when a change of auditors has taken place or is in process? a. The successor auditor should advise the client of his intention to contact the predecessor auditor and request permission for the contact b. The integrity of management should not be subject of communication between the predecessor and successor auditors c. Communication between the predecessor and successor auditors should take place only after the successor auditor has accepted the engagement d. All of the above 10. Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor’s a. opinion of any subsequent events occurring since the predecessor’s audit report was issued b. understanding as to the reasons for the change of auditors c. awareness of the consistency in the application of GAAP between periods d. evaluation of all matters of continuing accounting significance 11. Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding a. disagreements the predecessor had with the client

https://www.coursehero.com/file/14402585/AT1807-Preliminary-Engagement-Activitiespdf/

Page 6 of 7

d. Arrangements concerning the involvement of internal auditors and other client’s staff.

ar stu ed d y vi re aC s o ou urc rs e eH w er as o. co m

2. On recurring audits, the auditor may decide not to send a new engagement letter each year. However, he might decide to send a new letter when: a. There is a change in the auditors who will assist in the conduct of the audit. b. There is a legal requirement c. There is a change in the client's accounting policy for inventories. d. There is a change in the estimated life of the client's property and equipment.

d.

www.prtc.com.ph

AT.1507

EXCEL PROFESSIONAL SERVICES, INC. concerning auditing procedures and accounting principles b. the predecessor’s evaluation of matters of continuing accounting significance c. the degree of cooperation the predecessor received concerning the inquiry of client’s lawyer d. the predecessor auditor’s assessment of inherent risk and judgments about materiality 12. The successor auditor requested permission to communicate with the predecessor auditor and review certain portions of the predecessor auditor’s working papers. The prospective client’s refusal to permit this will bear directly on the successor auditor’s decision concerning the a. adequacy of the preplanned audit program b. ability to establish consistency in application of accounting principles between years c. apparent scope limitation d. integrity of management

d.

Greenworth may decide not to accept Kool Connections based upon the perceived risk of being associated with Kool. Greenworth will contact the BOA or the PICPA and ask for a review of the proposal prior to acceptance.

14. Which of the following factors most likely would influence an auditor’s determination of the auditability of the entity’s financial statements a. The complexity of the accounting system. b. The existence of related party transactions. c. The adequacy of the accounting records d. The operating effectiveness of control procedures. 15. If the auditor believes that an understanding with the client has not been established, he or she should ordinarily a. Perform the audit with increased professional skepticism b. Assess the control risk at the maximum level and perform a primarily substantive audit c. Decline to accept or perform the audit d. Modify the scope of the audit to reflect an increased risk of material misstatement due to fraud

ar stu ed d y vi re aC s o ou urc rs e eH w er as o. co m

13. Kool Connections, Inc. requests that Wreath and Greenworth Auditors make a proposal to provide audit services for the company. Which of the following is a correct assumption surrounding the result of the proposal? a. Greenworth is required to accept Kool Connections if selected as its auditors. b. Greenworth should interview the prior audit firm prior to releasing the proposal to Kool Connections.

c.

sh

Th

is

 - end of AT.1507 - 

https://www.coursehero.com/file/14402585/AT1807-Preliminary-Engagement-Activitiespdf/

Page 7 of 7

Powered by TCPDF (www.tcpdf.org)

www.prtc.com.ph

AT.1507