Ch05 Client acceptance with accounting $ finance

Client Acceptance
Professor Md. Zakir Hosen FCA 1

Client Acceptance Phase Objectives
 Examination of the proposed client to determine if
there is any reason to reject the engagement
(acceptance of the client) and convincing the client
to hire the auditor (acceptance by the client)
 Decide on acquiring a new client or continuation
of the relationship with and existing client
 Determine the type and amount of staff

Client Acceptance Procedures
 Evaluate the clients background and reasons for the
audit.
 Determine whether the auditor is able to meet the
ethical requirements regarding the client
 Determine need for other professionals.
 Communicate with predecessor auditor.
 Prepare client proposal.
 Select staff to perform the audit.
 Obtain an engagement letter.

Evaluate the clients background and reasons for the audit
Knowledge of a Client’s Business Helps Auditors
 to evaluate the engagement risks associated with accepting the
specific engagement and
 to help the auditor in determining whether all professional and
ethical requirements (including independence, competence, etc.)
regarding this client can be met.

Preliminary examination of clients
• New and existing clients
– visiting their premises,
– reviewing annual reports,
– having discussions with client's management and staff
– accessing public news and public information databases,
usually via the Internet.
• For an existing one, prior years' working papers should be
reviewed.
• For a new client, consult prior auditors and increase
preliminary information search.

Sources of Information for Client Evaluation
Illustration 5.2

Evaluate governance, internal controls and possible risks with
client's management and staff including
 Changes in management, organizational structure, and activities
of the client.
 Current government regulations
 Current business developments
 Current or impending financial difficulties or accounting
problems.
 Susceptibility of the entity’s financial statements to material
misstatement due to error or fraud.(BSA 240 & BSA 315)
 Existence of related parties. (BSA 550)
 New or closed premises and plant facilities.
 Recent or impending changes in technology, types of products
or services and production or distribution methods.
 Changes in the accounting system and the system of internal
control. Professor Md. Zakir Hosen FCA 7

New Client Review
 publicly available information,
 past company financial statements,
 reports to stockholders,
 government financial reports
 company premises via tour
 previous auditor relationship

Illustration 5.3

Ability to Meet Audit Team Ethics and Competence
 Independence of auditor (personal investments, client
business relationships, non-audit services, unpaid fees)
 Litigation
 Technical training and proficiency required in the
circumstances
 Partner rotation

Specific Competencies
 On the basis of the specific circumstances of the client and its
industry, the auditor should determine if the necessary expertise
regarding the industry, specific GAAP issues, or certain non-
audit skills are available to the audit team.
 Review existing partner and staff competencies:
– knowledge of relevant industries or subject matters;
– experience with relevant regulatory or reporting
requirements,
– ability to complete the engagement within the reporting
deadline;
Ability to Meet Audit Team Ethics and Competence

Determine need for other professionals
Group Engagement Partner, Specialist, Component Auditor
 An outside specialist such as IT, environmental or tax
specialist, may be needed to properly audit the client.
 BSA 600 applies when an auditor, acting as a group
engagement partner, decides to use the work of a component
auditor in the audit of group financial statements.
 Component auditor – An auditor who, at the request of the group
engagement team, performs work on financial information related to
a component for the group audit.
 The group audit partner is solely responsible for the direction,
supervision and performance of the group audit engagement
and whether the auditor’s report that is issued is appropriate in
the circumstances.

• The auditor has sole responsibility for the audit opinion
expressed, and that responsibility is not reduced by the
auditor’s use of the work of an auditor’s expert. Nonetheless,
if the auditor using the work of an auditor’s expert, having
followed this BSA, concludes that the work of that expert is
adequate for the auditor’s purposes, the auditor may accept
that expert’s findings or conclusions in the expert’s field as
appropriate audit evidence. It means the following:
• An Auditor’s expert as an individual or organization
possessing expertise in a field other than accounting or
auditing, whose work in that field is used by the auditor to
assist the auditor in obtaining sufficient appropriate audit
evidence.

Auditor’s Expert
When using an expert’s work the auditor MUST :
 Determine expert’s
Competence (professional certifications)
 Capabilities
 Objectivity
 The auditor shall agree, in writing when appropriate, with the
auditor’s expert:
 The nature, scope and objectives of that expert’s work
The respective roles and responsibilities of the auditor and
that expert
The nature, timing and extent of communication
The need for the auditor’s expert to observe confidentiality

Reference to the Auditor’s Expert in the Auditor’s Report
 The auditor shall not refer to the work of an auditor’s expert in
an auditor’s report containing an unmodified (unqualified)
opinion unless required by law or regulation to do so.
 .If the auditor makes reference to the work of an auditor’s
expert in the auditor’s report because such reference is relevant
to an understanding of a modification to the auditor’s opinion,
the auditor shall indicate in the auditor’s report that such
reference does not reduce the auditor’s responsibility for that
opinion.

Communicate with predecessor auditor
 ICAB Code of Ethics recommends that the new auditor
communicate directly with the previous auditor.
 The proposed accountant should request permission from the
client to communicate with existing accountant.
 When the prior accountant receives the communication, he
should ordinarily reply advising of any reasons why the
proposed accountant should not accept the appointment.
 First time engagements require evidence that opening balances
are not misstated, prior balances are correctly brought forward,
and proper accounting applied (BSA 510). In this case the
objective of the auditor with respect to opening balances is to
obtain sufficient appropriate audit evidence about whether:
(a) Opening balances contain misstatements that materially affect the current period’s
financial statements; and
(b) Appropriate accounting policies reflected in the opening balances have been
consistently applied in the current period’s financial statements, or changes thereto are
appropriately accounted for and adequately presented and disclosed in accordance
with the applicable financial reporting framework.

Prepare client proposal
On recurring audits, the auditor may decide not to send a new
engagement letter each year. However, the auditor should
consider sending a letter in the following circumstances:
there is an indication that the client misunderstands the
objective and scope of the audit,
the terms of the engagement are revised,
there has been a recent change in management,
the size or nature of the business has changed,
there are legal requirements that an engagement letter be
written.
Usually proposal includes the followings:
1. A review on how the auditing firm can add value
2. Plans for further improvement in value added
3. A description of the audit team
4. Fee proposal

1. A review of how the auditing firm can add value: The
introductory part of the client proposal is a discussion of how
the proposing firm can benefit the client firm.
2. Plans for further improvement in value added: This section
might identify the client’s requirements and discuss how the
audit firm meets these requirements. The audit scope and
materiality limits may also be discussed.
3. Audit team: An important part of the proposal is a description of
members of the audit team and summary of their work
experience.
4. A fee proposal: The detailed description of the proposed fee is
traditionally a separate part of the proposal, presented as a
separate document.

New Client Audit Proposal
 An executive summary
 Client’s business and audit expectations
 Strengths of the audit firm
 Audit team
 Audit approach
 Client’s internal auditors
 Transition needs
 Other services of the audit firm
 After service monitoring
 Fee details
 Appendix

Sample Table of Contents of New Client Proposal
1. The executive summary: gives a brief summary of the proposal
with special emphasis on client expectation, audit approach, firm
selling points, and co-ordination of the audit with staff internal
auditors.
2. The client’s business and audit expectations: is a description of
client business sectors, technology, financial strengths and
divisions.
3. Strengths of the audit firm: may explore client service attitudes,
technical competency, experience, desire to exceed expectations,
and advise
4. The audit team: This section includes a description of members
of the audit team and summary of their work experience.
5. The audit approach: The proposal may outline the firms general
audit approach and how it is tailored to this client.

Sample Table of Contents of New Client Proposal
6. The client’s internal auditors: their work must be relied upon to a
certain extent in all audits.
7. Transition needs and management: the transition needs of the
company may be very important in convincing a new client to
switch auditors.
8. Services audit firm can supply to client: might list tax, treasury,
management and other services offered by the audit firm.
9. After service monitoring: After the audit is complete there are still
opportunities for the auditor to offer service to the client.
10. Fee details: traditionally a separate part of the proposal presented
as a separate document, details the costs of the audit.

Professional fees should be a fair reflection of the
following:
 the skill and knowledge required for the type of professional
services involved
 the level of training and experience of the persons performing
the services
 the time necessarily to perform services;
 the degree of responsibility that performing those services
entails.
 No contingency fees

Select staff to perform the audit
Appropriate staff, knowledgeable about the client’s industry, must be
assigned to the engagement.
In order that they may effectively carry out their work, the
assigned engagement staff should have the following capabilities and
competencies:
1. An understanding of, and practical experience with, audit
engagements of similar nature and complexity through appropriate
training and participation.
2. Appropriate technical knowledge, including knowledge of relevant
information technology.
3. Knowledge of relevant industry in which the client operates.
4. Ability to apply professional judgment.
5. An understanding of the firm's quality control policies and
procedures
6. An understanding of professional standards and regulatory and
legal requirements.
The engagement team will usually consist of a partner, manager, audit
senior and junior. Professor Md. Zakir Hosen FCA 23

Audit engagement letter
The agreed terms of the audit engagement shall be recorded in an
audit engagement letter or other suitable form of written
agreement and shall include:
(a) The objective and scope of the audit;
(b) The responsibilities of the auditor;
(c) The responsibilities of management;
(d) Identification of the applicable financial reporting framework;
and
(e) Reference to the expected form and content of any reports to
be issued by the auditor and a statement that there may be
circumstances in which a report may differ from its expected
form and content

In order to establish whether the preconditions for an audit are
present, the auditor shall:
(a) Determine whether the financial reporting framework to be
applied in the preparation of the financial statements is
acceptable; and
(b) Obtain the agreement of management that it acknowledges
and understands its responsibility
(i) For the preparation of the financial statements in
accordance with the applicable financial reporting
framework, including where relevant their fair
presentation;
(ii) For such internal control as management determines is
necessary to enable the preparation of financial statements
that are free from material misstatement, whether due to
fraud or error; and

(iii) To provide the auditor with:
a. Access to all information of which management is aware
that is relevant to the preparation of the financial
statements such as records, documentation and other
matters;
b. Additional information that the auditor may request from
management for the purpose of the audit; and
c. Unrestricted access to persons within the entity from
whom the auditor determines it necessary to obtain audit
evidence.

Ch05 Client acceptance with accounting $ finance

More Related Content

Similar to Ch05 Client acceptance with accounting $ finance

Recently uploaded

Ch05 Client acceptance with accounting $ finance