Assurance: Obtaining and Accepting an Audit Engagement
Obtaining an assurance engagement is a structured process involving three key phases: securing the opportunity, rigorously accepting the nomination, and formally agreeing to the terms. Acceptance requires the prospective auditor to confirm independence, assess management integrity, ensure adequate resources, and communicate with the existing auditor to understand the reasons for the change. The engagement letter formalizes the scope and responsibilities.
Key Takeaways
Auditors must assess independence and resource adequacy before accepting any new client engagement.
Communication with the existing auditor is mandatory, requiring client permission to proceed ethically and professionally.
Management integrity and client risk profile (high or low) are crucial factors in the acceptance decision process.
The engagement letter defines the scope, responsibilities, and reporting framework to prevent future misunderstandings.
Post-acceptance procedures include validating the legal removal of the predecessor auditor and confirming the new auditor's valid appointment.
How do auditors obtain new assurance engagements?
Auditors typically obtain new assurance engagements through two primary methods: professional advertising and responding to formal invitations to tender for services. Accountants are permitted to advertise their services for clients, but they must strictly adhere to specific professional guidelines and ethical standards established by regulatory bodies, although the detailed rules are often not required knowledge for basic understanding. Tendering involves submitting a competitive proposal when formally invited by a prospective client, allowing the audit firm to compete for the engagement based on its qualifications, experience, and proposed audit approach, which is a common practice in the industry today.
- Accountants are permitted to advertise for clients within certain professional guidelines.
- Accountants are often invited to tender for particular engagements, submitting formal proposals.
What considerations are essential before accepting a new audit engagement?
Before accepting nomination, a prospective auditor must conduct rigorous due diligence, focusing on independence, ethics, and legal compliance to protect professional standing. This involves ensuring the auditor is not disqualified on legal or ethical grounds and that the new appointment is conducted in a proper, legal manner, often requiring review of corporate resolutions. Furthermore, the firm must assess its capacity, ensuring existing resources—including available time, staff, and technical expertise—are adequate to perform the audit effectively and meet client deadlines without compromising quality.
- Ensure professional qualification to act as external auditor, checking whether they could be disqualified on legal or ethical grounds.
- Confirm existing resources are adequate, considering available time, staff levels, and necessary technical expertise for the engagement.
- Communicate with the existing auditor to inquire about any reasons or circumstances behind the change that the new auditor ought to know.
- Obtain client permission to communicate with the existing auditor; if permission is denied, the nomination must be formally declined.
- Assess management integrity and reputation by obtaining references from third parties like bankers, lawyers, or previous auditors.
- Identify low-risk clients by looking for good long-term prospects, strong internal controls, and competent, honest management practices.
- Identify high-risk clients by noting poor recent performance, significant control weaknesses, or questionable integrity evidence.
- After acceptance, ensure the outgoing auditor's removal was properly conducted and the new auditor's appointment is legally valid.
Why is an engagement letter necessary and what does it contain?
The engagement letter is essential for formally agreeing to the terms of the assurance engagement, serving two main purposes. First, it clearly defines the extent of the firm's responsibilities, minimizing the possibility of any misunderstanding between the client and the firm regarding the scope and limitations of the audit. Second, it provides written confirmation of the firm's acceptance of the appointment, detailing the scope of the engagement, the applicable reporting framework, and the specific form of the report to be issued upon completion of the work, ensuring clarity for all stakeholders.
- Define clearly the extent of the firm's responsibilities to minimize potential misunderstandings between the client and the firm.
- Provide written confirmation of the firm's acceptance of the appointment, detailing the scope of the engagement and services.
- Specify the objective of the audit of financial statements and the applicable reporting framework to be used clearly.
- Detail the auditor's responsibility and management's responsibility, including the requirement for unrestricted access to information.
- Outline the expected form and content of any reports to be delivered to the client upon completion of the audit.
Frequently Asked Questions
What is the primary purpose of communicating with the existing auditor?
The primary purpose is to inquire whether there are any professional or ethical reasons or circumstances behind the change that the prospective auditor ought to know, also serving as a matter of professional courtesy. This communication requires the client's explicit permission.
What are the basic factors considered when assessing a new client's risk?
Basic factors include assessing management's integrity and determining the client's risk level. High-risk indicators include poor recent performance, likely lack of finance, or significant control weaknesses, while low-risk clients are well-financed with competent management.
What key elements must be included in the formal engagement letter?
The engagement letter must detail the objective and scope of the audit, the responsibilities of both the auditor and management (including unrestricted access), the applicable reporting framework, and the expected form of the final audit report.
