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A2.M3 - Terms of Engagement

Terms in this set (10)

(2) A successor auditor's inquiries of the predecessor auditor should include questions regarding:
A successor auditor's inquiries of the predecessor auditor should include questions regarding the predecessor's understanding as to the reasons for the change in auditors.
(2) Should a successor auditor request the new client to authorize the predecessor auditor to allow a review of the predecessor's engagement letter and working papers?
It is not appropriate for the auditor to request a review of the predecessor auditor's engagement letter. This is a business matter between the client and the predecessor auditor that has no impact on the current audit period. Conversely, review of the predecessor auditor's working papers (audit documentation) is appropriate and customary to facilitate the auditor's audit.
(2) Does the successor auditor need to request permission from the prospective client to make inquiry of the predecessor auditor?
Yes
(2) Prior to commencing fieldwork, an auditor usually discusses the general audit strategy with the client's management. What matters do the auditor and management agree upon at this time?
Prior to commencing fieldwork, an auditor would establish an understanding with the client as to the services to be performed and the overall audit strategy. This understanding may include arrangements involving the conduct of the engagement, such as timing, client assistance, and the availability of documents.
(2) Davis, CPA, accepted an engagement to audit the financial statements of Tech Resources, a nonissuer. Before the completion of the audit, Tech requested Davis to change the engagement to a compilation of financial statements. Before Davis agrees to change the engagement, Davis is required to consider:
When an auditor is requested to change the engagement from an audit to a compilation, the auditor must consider the effort needed to complete the audit, the cost of completing the audit, and the reasons for the client's request. If the audit is substantially complete or an insignificant effort is needed to complete the audit, the auditor should consider the propriety of agreeing to the request. In addition, if the reason for the request is to limit the scope of the auditor's examination, the auditor must consider whether the information affected by the scope limitation is incorrect, incomplete, or otherwise unsatisfactory. A change in circumstance, (e.g., an audit is no longer necessary) or a misunderstanding as to the nature of an audit would, on the other hand, be considered a reasonable basis for the change.
(2) Which factor most likely would cause a CPA to decide not to accept a new audit engagement? 1.) Management's disregard of its responsibility to maintain an adequate internal control environment. 2.) Management's refusal to permit the CPA to perform substantive tests before the year-end.
The control environment is the foundation for all other components of internal control. Management's disregard of its responsibility to maintain an adequate internal control environment therefore compromises its ability to provide reasonable assurance regarding reliable financial reporting. The auditor may conclude that the risk that the financial framework used by the client may be unacceptable is great enough that an audit should not be conducted. On the other hand, Substantive tests are generally performed after year-end, since prior to that time the financial statements have not been finalized.
(2) Before accepting an audit engagement, a CPA should evaluate whether conditions exist that raise questions as to the integrity of management. Which of the following conditions most likely would raise such questions?
1.) The CPA will not be permitted to have access to sensitive information regarding the salaries of senior management. 2.) There have been substantial inventory write-offs just before the year-end in each of the past four years. @ An auditor may question the integrity of management if the auditor is not permitted to have access to sensitive information regarding the salaries of senior management. The auditor should have access to all information that is relevant to the preparation and fair presentation of the financial statements. On the other hand, substantial inventory write-offs just before year-end in each of the past four years does not necessarily raise questions about the integrity of management. The inventory write-offs appear to be consistent year over year and may be characteristic of the business. (e.g., obsolescence or spoilage of inventory)
(2) In connection with an audit of a nonissuer, the auditor would ordinarily use an engagement letter to:
Specify any arrangements concerning the involvement of the company's internal auditors on the audit. Content of an engagement letter would ordinarily include, among other items, information regarding the involvement of other auditors, specialists, internal auditors, or other staff of the entity.
(2) The element of the audit planning process most likely to be agreed upon with the client before implementation of the audit strategy is the determination of the:
Timing of inventory observation procedures to be performed. In order to observe the physical inventory count, the auditor would have to coordinate schedules with the client. This timing is usually agreed upon before implementation of the audit strategy.
(2) If the predecessor auditor refuses to give the current auditor of a nonissuer access to the documentation, what should the current auditor do?
If the predecessor auditor refuses to give the current auditor of a nonissuer access to the documentation, the current auditor should review the risk assessment of the opening balances of the financial statements.
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