Chapter 3 Engagement Planning

Chapter 3 Engagement Planning - Chapter 3 Engagement...

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Chapter 3: Engagement Planning Learning Objective: 1---Pre-Engagement Activities Public accounting firms try to reduce their own business risks by managing their audit engagements. Their firms undertake several activities before beginning audit engagement called risk management activities. Risk in an audit engagement refers to probability that firm could “blow” the audit opinion. The new professional standards for public companies state the auditor perform the following: Perform procedures regarding the acceptance or continuance of audit client relationship Determine compliance with independence and ethics requirements Reach a contractual understanding with client for terms and conditions of the audit engagement. Client Acceptance or Continuance Imp element of public accounting firm’s quality control policies and procedures is a system for deciding whether to accept a new client and on continuing basis, with existing clients The process activities are clearly focused on understanding and managing risks to the audit firm. The public accounting firm that has terminated or has voluntarily withdrawn from engagement (whether the audit has been completed or not) is known as predecessor auditor. To reduce the risk of accepting a problem client, auditing standards require a prospective auditor to initiate contact with and attempt to obtain basic info directly from predecessor regarding issues that reflect directly on integrity of management. Client acceptance and continuance policies and procedures generally include: Review financial info about client like annual reports, registration statements, and form 10K Criminal background checks for senior managers. Inquiring prospective client’s bankers, legal counsel, underwriters, analysts or other persons who do business with entity for info about entity. Consider whether engagement would require special attention or involve unusual risks to public accounting firm. Evaluate public accounting firm’s independence with regard to prospective client. Consider the need for individuals possessing special skills or knowledge to complete audit. Client continuance decisions are similar to acceptance decisions except that firm will have more firsthand experience with entity. The purpose of these public disclosures is to make information available about client-auditor conflicts that have occurred. If this consent is refused, the refusal should be regarded as a red flag and the auditor should be cautious about accepting the engagement. Compliance with Independence and Ethical Requirements Auditors are expected to be unbiased and impartial with respect to the financial statements and other information they audit. This “state of mind” is referred to as the auditor processing independence in fact.
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