Introduction
Before accepting an audit engagement accountants
should first consider whether or not they can take on the work from an ethical,
legal and practical point of view.
should first consider whether or not they can take on the work from an ethical,
legal and practical point of view.
Ethical considerations have been dealt with in
chapter 6. For example, an audit firm
chapter 6. For example, an audit firm
cannot accept a client where the total value
of fees would exceed 15 per cent of the firm’s total fee income or where a
partner in the firm is closely related to a director of the proposed audit
client.
Assuming there are no ethical problems around
independence and objectivity there are practical considerations to take into
account.
independence and objectivity there are practical considerations to take into
account.
Client screening
When a firm is approached to take over an existing
audit from another firm, or is to be appointed as the auditors they must make
some investigations before they accept the appointment.
audit from another firm, or is to be appointed as the auditors they must make
some investigations before they accept the appointment.
The ISA 315 obtaining an understanding of the
entity and assessing the risks of a material misstatement requires the auditors
to obtain a thorough understanding of the client, its industry and its business
environment. We look at this in more detail in chapter 10.
entity and assessing the risks of a material misstatement requires the auditors
to obtain a thorough understanding of the client, its industry and its business
environment. We look at this in more detail in chapter 10.
However, this process begins before the client is
accepted.
accepted.
It is incumbent on the incoming auditor to discover
all they can about their potential client. This will include:
all they can about their potential client. This will include:
·
Establishing
the potential client’s business, its products and customer base-what does it
actually do?
Establishing
the potential client’s business, its products and customer base-what does it
actually do?
·
Consideration
of the potential client’s position in its industry and its reputation-is it a
reputable company or is it seen as being a bit dubious?
Consideration
of the potential client’s position in its industry and its reputation-is it a
reputable company or is it seen as being a bit dubious?
·
Consideration
of the potential client’s management and their ability-is it a new company with
inexperienced, perhaps unqualified management or has a successful track record?
Consideration
of the potential client’s management and their ability-is it a new company with
inexperienced, perhaps unqualified management or has a successful track record?
·
Consideration
of the strength of the finance function-does the company have a qualified
financial director, is the finance function a part of the business or is it
seen as a necessary evil by the operational directors?
Consideration
of the strength of the finance function-does the company have a qualified
financial director, is the finance function a part of the business or is it
seen as a necessary evil by the operational directors?
·
Reviewing
the client’s financing and capital structure-how is it financed, are there any
potential problem areas looming involving repayment of loans or debentures?
Reviewing
the client’s financing and capital structure-how is it financed, are there any
potential problem areas looming involving repayment of loans or debentures?
·
Consideration
of any particular legal or special reporting requirements-is it in a highly
regulated industry where additional certificates may be required or special
reports prepared?
Consideration
of any particular legal or special reporting requirements-is it in a highly
regulated industry where additional certificates may be required or special
reports prepared?
Sources of information will include:
·
Previously
published accounts.
Previously
published accounts.
·
Trade
literature and brochures.
Trade
literature and brochures.
·
Press and
magazine articles.
Press and
magazine articles.
·
The
internet.
The
internet.
·
Local
knowledge.
Local
knowledge.
·
Discussions
with the potential client and any detailed information provided by the client
in response to enquiries, w.g. management information.
Discussions
with the potential client and any detailed information provided by the client
in response to enquiries, w.g. management information.
Other considerations
The auditors have to consider:
·
Whether
or not they have the physical resources to carry out the audit satisfactorily.
This includes not only physical locations and availability of staffs, but also
whether or not any specific expertise, e.g. computer auditing is required.
Whether
or not they have the physical resources to carry out the audit satisfactorily.
This includes not only physical locations and availability of staffs, but also
whether or not any specific expertise, e.g. computer auditing is required.
·
Any
potential conflicts of interest-does the firm represents any other client
connected with the potential new one?
Any
potential conflicts of interest-does the firm represents any other client
connected with the potential new one?
·
If there
are any considerations which must be taken into account in connected with possibility
of money laundering, insider dealing or any other dubious activities?
If there
are any considerations which must be taken into account in connected with possibility
of money laundering, insider dealing or any other dubious activities?