Chapter 2: Process of Assurance Obtaining and Engagement

Chapter 2: Process of Assurance Obtaining and Engagement
Process of Assurance Obtaining and

Engagement
1. Obtaining an Engagement
2. Accepting an Engagement
2.1 Appointment Consideration
1.2 Other Assurance Engagement
3. Agreeing Terms of an Engagement
3.1 Audit Engagement Letter
Obtaining an Engagement:
Accountants are often invited to tender for particular engagements, which means that they offer a quote
for services, outlining the personnel, usually in competition with other firms which are tendering at the
same time.
Accepting an Engagement:
The present and proposed auditors should normally communicate about the client prior to the audit
being accepted. The client must be asked to give permission for communication to occur. If the client
refuses to give permission, the proposed auditors must consider the reasons for such refusal. The
auditors must ensure they have sufficient resources (time and staff, for example) to carry out the
appointment.
The following procedures should be carried out after accepting nomination:
Ensure that the outgoing auditors' removal or resignation has been properly conducted in
accordance with national legislation.
The new auditors should see a valid notice of the outgoing auditors' resignation, or confirm
that the outgoing auditors were properly removed.
Ensure that the new auditors' appointment is valid. The new auditors should obtain a copy of
the resolution passed at the general meeting appointing them as the company's auditors.
Set up and submit a letter of engagement to the directors of the company.
Schedule C of ICAB Code of Ethics as well as IFAC Code of Ethics sets out the rules under which
accountants should accept new appointments.
Before a new audit client is accepted, the auditors must ensure that there are no independence or other
ethical issues likely to cause significant problems with the ethical code (i.e. significant threats to
complying with the fundamental principles of ethical behaviour).
The nominee auditors must carry out the following procedures.

Few Basic Factors to be Considered:
The integrity of those managing a company will be of great importance, particularly if the
company is controlled by one or a few dominant personalities.
The audit firm will also consider whether the client is likely to be high or low risk to the firm in
terms of being able to draw an appropriate assurance conclusion in relation to that client. The
following table contrasts low and high risk clients:
Low Risk High Risk
Good long-term prospects Poor recent or forecast performance

Well-financed Likely lack of finance
Strong internal controls Significant control weaknesses
Conservative, prudent accounting policies Evidence of questionable integrity, doubtful accounting policies
Competent, honest management Lack of finance director

Few unusual transactions Significant unexplained transactions or transactions
with connected companies
Sources of information about new clients:
Prospective auditors should seek the prospective permission to contact the previous auditors. If
this permission is not given, the prospective auditors should consider carefully the reason for such
refusal when determining whether or not to accept the appointment. Normally permission will be
given, so the prospective auditors can write to the outgoing auditors.
Generally, the expected fees from a new client should reflect the level of risk expected. They should
also offer the same sort of return expected of clients of this nature and reflect the overall financial
strategy of the audit firm. Occasionally, the audit firm will want the work to gain entry into the client's
particular industry, or to establish better contacts within that industry.
The audit firm will generally want the relationship with a client to be long term. This is not only to
enjoy receiving fees year after year; it is also to allow the audit work to be enhanced by better
knowledge of the client and thereby offer a better service.
Conflict of interest problems can be significant; the firm should establish that no existing clients will
cause difficulties as competitors of the new client. Other services to other clients may have an impact
here, not just audit.
The audit firm must have the resources to perform the work properly, as well as any specialist
knowledge or skills. The impact on existing engagements must be estimated, in terms of staff time and
the timing of the audit.
An engagement letter should be sent to all clients to clarify the terms of the engagement.
Agreement of audit engagement terms must be in writing.
It must include an explanation of the scope of the audit, the limitations of an audit and the
responsibilities of auditors and those charged with governance.
The agreed terms must be in writing and the usual form would be a letter of engagement. Any other
form of appropriate contract, however, may be used.
The form and remaining content of audit engagement letters may vary for each client, but they
would generally include reference to the following:
The objective of the audit of financial statements.

Management's responsibility for the financial statements.
The scope of the audit, including reference to applicable legislation, regulations, or

pronouncements of professional bodies to which the auditor adheres.
The form of any reports or other communication of results of the engagement.
The fact that because of the test nature and other inherent limitations of an audit, together with
the inherent limitations of any accounting and internal control system, there is an unavoidable
risk that even some material misstatement may remain undiscovered.
Unrestricted access to whatever records, documentation and other information is requested in

connection with the audit.
The auditor may wish to include in the letter the following items:
Arrangements regarding the planning of the audit.
Expectation of receiving from management written confirmation of representations made in
connection with the audit.
Request for the client to confirm the terms of the engagement by acknowledging receipt of the
engagement letter.
Description of any other letters or reports the auditor expects to issue to the client.
The confidentiality of any reports issued, and, if relevant, the terms under which they can be shared
with third parties.
Basis on which fees are computed and any billing arrangements.
When relevant, the following points could also be made:
Arrangements concerning the involvement of other auditors and experts in some aspects of the
audit.
Arrangements concerning the involvement of internal auditors and other client staff.
Arrangements to be made with the predecessor auditor, if any, in the case of an initial audit.
A reference to any further agreements between the auditor and the client.

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Chapter 2: Process of Assurance Obtaining and Engagement

Process of Assurance Obtaining and

The nominee auditors must carry out the following procedures.

Good long-term prospects Poor recent or forecast performance

Competent, honest management Lack of finance director

Sources of information about new clients:

The objective of the audit of financial statements.

The scope of the audit, including reference to applicable legislation, regulations, or

Unrestricted access to whatever records, documentation and other information is requested in

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