In this chapter, the learning objectives are: Understand the auditor's requirements for client acceptance and continuance, understand the steps that are involved in the preliminary engagement activities, know what is required to establish an understanding with the client, know the types of information that are included in an engagement letter. | Chapter Five Audit Planning and Types of Audit Tests The Phases of an Audit That Relate to Audit Planning Preplanning Assess risks and establish materiality Plan the audit Client acceptance and continuance Establish the terms of the engagement Prospective Client Acceptance Obtain and review financial information. Inquire of third parties. Communicate with the predecessor auditor. Consider unusual business or audit risks. Determine if the firm is independent. Determine if the firm has the necessary skills and knowledge. Determine if acceptance violates any applicable regulatory or ethical requirements. Continuing Client Retention Evaluate client retention periodically Near audit completion or after a significant event Conflicts over accounting & auditing issues Dispute over fees Establish Terms of the Engagement The terms of the engagement, which are documented in the engagement letter, should include the objectives of the engagement, management’s responsibilities, the auditor’s responsibilities, and the limitations of the engagement. In establishing the terms of the engagement, three topics must be discussed: The engagement letter The internal auditors Those charged with governance. The Engagement Letter The engagement letter formalizes the arrangement reached between the auditor and the client. In addition to the items mentioned in the sample engagement letter in Exhibit 5-1 in the textbook, the engagement letter may include: Arrangements for use of experts or internal auditors. Any limitations of liability of the auditor or client. Additional services to be provided. Arrangements regarding other services. Internal Auditors Internal Auditors Those Charged with Governance Board of Directors Audit Committee Preplanning Determine the Audit Engagement Team Requirements Assess Independence Assess Risks and Establish Materiality Use audit risk model Restrict risk at account balance level Achieve acceptable level of audit risk You may want to review the detailed . | Chapter Five Audit Planning and Types of Audit Tests The Phases of an Audit That Relate to Audit Planning Preplanning Assess risks and establish materiality Plan the audit Client acceptance and continuance Establish the terms of the engagement Prospective Client Acceptance Obtain and review financial information. Inquire of third parties. Communicate with the predecessor auditor. Consider unusual business or audit risks. Determine if the firm is independent. Determine if the firm has the necessary skills and knowledge. Determine if acceptance violates any applicable regulatory or ethical requirements. Continuing Client Retention Evaluate client retention periodically Near audit completion or after a significant event Conflicts over accounting & auditing issues Dispute over fees Establish Terms of the Engagement The terms of the engagement, which are documented in the engagement letter, should include the objectives of the engagement, management’s responsibilities, the auditor’s .
