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Unformatted text preview: EOC #7 and #8 Chapter 5 AUDIT PLANNING AND TYPES OF AUDIT TESTS 5-2 The successor auditor is responsible for initiating the communication with the predecessor auditor. However, the successor auditor should request permission of the prospective client before contacting the predecessor auditor. The successor auditor's communication with the predecessor auditor should include questions related to the integrity of management, disagreements with management over accounting and auditing issues, and the predecessor auditor's understanding of the change in auditors. 5-3 An engagement letter is used to formalize the arrangement reached between the auditor and client. It serves as a contract that outlines the responsibilities of both parties and is intended to prevent misunderstandings between the two parties. The letter states the responsibilities of the auditor and management, that the audit will be conducted in accordance with auditing standards, that certain types of audit procedures will be conducted and written representations will be obtained from management, and that the audit may not detect all material errors and fraud. Exhibit 5-1 in the text contains a sample engagement letter. In addition, the engagement letter might include: Arrangements involving the use of spets or internal auditors. Any limitation of the liability of the auditor or client, such as indemnification to the auditor for liability arising from knowing misrepresentations to the auditor by management. (Note that regulatory bodies, such as the SEC, may restrict or prohibit such liability limiting arrangements.) Additional services to be provided relating to regulatory requirements Arrangements regarding other services (e.g., assurance, tax, or consulting services). 5.5 An audit committee is a subcommittee of the board of directors composed of independent members. The audit committee is responsible for the financial reporting and disclosure process. The committee should encourage fair reporting from the perspective of the stockholders, creditors, and employees. The audit committee should meet regularly with the external and internal auditors, providing for the independence of the external and internal auditors....
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- Spring '11