Quiz 3: Audit Planning, Types of Audit Tests, and Materiality


Acceptance of Client The CPA firm should accept the new client only after inquiring third parties. These parties include client's bankers, Creditors, previous auditor. CPA firm should be aware of the reason of change of auditor. Consideration while accepting prospective client Statement on Quality Control Standard 1 Section 90 specifies the procedure for accepting the new client and the terms related to continuing clients. Following are some evaluation points which the CPA firms should follow- • Analyse credibility position of the client from other group of companies working in the same industry. • Financial statement should be analysed to know the reputation and business position of the prospective client. The CPA firms should also consider key persons and management people of clients. • Gather information from legal agencies or bankers, lawyers who have previously worked with the prospective client or who have knowledge about the prospective client. The solvency position can be analysed by enquiring debt holders. • The CPA firm should understand the reasons of change of auditor. As per SAS-7, the new auditor can inquire about the prospective client by asking number of questions related to statutory compliances, accounting standards followed by company. The preceding auditor and the client should also cooperate with the CPA firms. This is considered one of the important inquiries done by CPA firms before accepting the engagement with new client. Conclusion Apart from inquiring from third parties, the audit firm should consider that their independence should not be compromised while executing the audit.

The successor auditor before accepting an engagement should enquire about the prospective client from the predecessor auditor. The following information may be gathered- 1. Information regarding the integrity of the management. 2. Disagreement with the management on accounting, auditing policies and other significant issues. 3. Communication to those charged with the governance regarding fraud and non -compliances of law. 4. Communication to those charged with governance material weaknesses and deficiencies in internal control. 5. The probable understanding/ reason of change of the auditor.

The Engagement letter is a written communication with the client and lays down the understanding of the audit engagement. It is a formal contract which outlines the responsibility of both the parties and prevents any future misunderstandings. The important information of the letter is as follows- 1. Services and related reported to be provided by the auditor. 2. The auditor's responsibilities in relation to the audit engagement and the limitations. 3. The management responsibilities towards the auditor's and audit engagement. 4. Timing and fees relating to audit. 5. Additional services to be provided in relation to other statutory requirements. 6. Arrangements regarding use of work specialist or internal auditors.