The audit committee of the client's board of directors is responsible for the selection and appointment of the independent external auditor, and for reviewing the nature and scope of the engagement.
As part of the pre-acceptance phase of the engagement, the auditor should consider and document compliance with the firm's quality control policies and procedures related to client acceptance and continuance. Specifically, the auditor should assess the following:
Firm's Ability to Meet Reporting Deadlines
Firm's Ability to Staff the Engagement
Independence
Integrity of Client Management
Group Audits
Before accepting an audit engagement with a new or existing audit client, the auditor should establish that the preconditions for an audit are present. If the preconditions for an audit are not present, the auditor should not accept the proposed engagement, unless the auditor is required by law or regulation to do so. The following should be considered:
Applicable Financial Reporting Framework
Management Responsibilities
Management-Imposed Scope Limitation
The auditor should agree to the terms of the engagement with management or those charged with governance, as appropriate. This agreement should be documented in an engagement letter or other suitable form of written agreement. If the auditor believes an agreement with the client has not been established, he or she should decline to accept or perform the engagement. The engagement letter should be accepted (signed and dated) by the client and included with the auditor's documentation.
A recurring audit is an audit engagement for an existing audit client for whom the auditor performed the preceding audit. On recurring audits, the auditor should assess whether circumstances require the terms of the engagement to be revi sed. The following factors may make it appropriate to revise the terms of the engagement:
Any indication that management misunderstands the objective or scope of the audit
Any revised or special engagement terms
A change in senior management
A significant change in ownership
A significant change in the nature or size of the entity's business
A change in legal or regulatory requirements
A change in financial reporting framework
A change in other reporting requirements
An initial audit is an engagement in which the financial statements for the prior period were not audited or were audited by a predecessor auditor.
A predecessor auditor is one who was engaged to audit a prior financial statement (even if the audit was not completed). In an initial audit, including a reaudit engagement, it is mandatory to make inquiries of the predecessor auditor. Client permission is needed, however. If the client is unwilling to agree to this procedure, the auditor should consider the implications and decide whether to accept the engagement.
During the course of an engagement, a client may ask the accountant to change an audit to a compilation or review, or a review to a compilation. Before agreeing to a change, an accountant should consider:
the reason for the request, especially if there are scope limitations;
the effort required to complete the engagement; and
the estimated additional cost to complete the engagement.
If the accountant decides a change in the engagement is justified, he or she must comply with the standards for a compilation or review, and then issue an appropriate report. The report should not refer to the original engagement, any procedures performed as part of the engagement, or any scope limitation.
A successor auditor should request the new client to authorize the predecessor auditor to allow a review of the predecessor's:
Which of the following matters generally is included in an auditor's engagement letter?
Management's responsibility for the fair presentation of the financial statements.
The factors to be considered in setting preliminary judgments about materiality.
Management's vicarious liability for violations of laws and regulations committed by its employees.
The auditor's responsibility to search for significant internal control deficiencies.