Assurance (Knowledge Level) 02nd Chapter

Process of Assurance: Obtaining an Engagement

01. What is audit engagement letter? [P- ]

An engagement letter defines the legal relationship between a professional firm and its client(s). This
letter states the terms and conditions of the engagement, objective and scope of the audit, the extent of
the auditors responsibilities to the client and the form of their report. It must be in writing.

02. Who sets out the rules to accept new audit appointments? [P- 20]
Schedule C of ICAB &
IFAC
Code of Ethics sets out the rules under which accountants should accept new appointments.

03. Describe the Assurance Engagement Acceptance procedure. [P- 20] [J-12,13]
The nominee auditors must carry out the following procedures:
Ensure professionally qualified to act
Ensure existing resources adequate
Obtain references
Communicate with present auditors

04. Contrasts the low and high risk clients. [P- 21] [J-12,13]
How we can ascertain low and high risk about new client?
How will you determine the low & high risk clients?
What factors should consider about risk?

The following table contrasts low and high risk clients:

Subject Low risk High risk
Trends Good long-term prospects Poor recent or forecast performance
Finance condition Well-financed Likely lack of finance
Internal control Strong internal controls Significant control weaknesses
Accounting Conservative, prudent accounting Evidence of questionable integrity, doubtful
policies policies accounting policies
Management Competent, honest management Lack of finance director
Unusual Few unusual transactions Significant unexplained transactions or
transactions transactions with connected companies

05. How do we get information about new clients? [P- 22]

Source of information about new clients are as given below:
Enquires of other sources (Banks, solicitors)
Review of documents (Annual report, Credit rating)
Previous accountants/auditors
Review of rules & standards

Anamul Huq (M.Z. Islam & Co.) Page 1 of 3

Assurance (Knowledge Level) 02nd Chapter

06. If new client decline permission to contact with previous auditor than what factor should be consider by
the prospective auditor? [P- 22] [J-10; D-11]
If new client refuse to give permission to contact with pervious auditor than prospective auditor should consider
carefully-
The reason for this refusal Audit risk
Impact of the refusal Possibility to reduce the audit risk
Auditors independence
And than prospective auditor will refuse or accept the appointment.

07. Write the communication letter with previous auditor. [P- 22]
To,
Retiring & Co.
Chartered Accountants
Ref: New client Co. Ltd.
Dear Sir,
We are pleased to inform you that the management of New Client Co. Ltd has been appointed us as auditor for
audit of the accounts of the company for the year ended 30 June, 2013.
As you were the previous auditor of the Company, we shall be glad if you have no objection to accept us the said
assignment.
Acquiring & Co.
Chartered Accountants

08. Which matter must be considered after accepting nomination an engagement? [P- 24]
What procedures should be carried out after accepting nomination?
The following procedures should be carried out after accepting nomination:
Ensure that the outgoing auditors were properly removed.
Ensure that the new auditors appointment is valid
Set up & submit a letter of engagement to the directors.

09. Why do need an engagement letter? [P- 25] [D-12]

Describe the purpose of audit engagement letter.
Purpose of an engagement letter is
To clarify the terms of the engagement
To clarify the extent of the firms responsibility
Minimize misunderstanding between the client & firm
Express the scope of the audit
To confirm acceptance of the appointment.

10. What matters are including in an audit engagement letter? [P- 25] [J-10,13; D-11]
Describe the content of audit engagement letter.
Content of audit engagement letter are given below: Additional content:
Objective of the audit. Involvement of any other auditor.
Scope of the audit. Involvement of the expertise.
Managements responsibility. Audit plan.
Reporting form. Fees.
Nature & other inherent limitation. Any restriction of auditors liability.
Unrestricted access to auditors.

Anamul Huq (M.Z. Islam & Co.) Page 2 of 3

Assurance (Knowledge Level) 02nd Chapter

11. What factor should be considered, if the risk level of audit is high? [P- ]
If the risk level of audit is high than prospective auditor should be consider following factor-
Closely monitor about high risk client
Try to mitigate the risk
If it is not possible to mitigate the risk than the acceptance should be canceled.

Interactive question 1: Accepting appointment [Difficulty level: Easy]

Identify whether the following are true or false. The audit firm should consider the following factors when
determining whether to accept an engagement.

True False
Whether the firm is ethically barred from acting.
Whether the firm has sufficient resources to carry out the engagement.
Whether the firm can make sufficient profit from the engagement.
Whether the client is new to the firm.
Whether the client gives permission to contact the outgoing auditors.

Interactive question 2: Engagement letters [Difficulty level: Exam standard]

Which three of the following will normally be contained within a letter of engagement?

Responsibilities of the auditors

Responsibilities of the directors

The staff assigned to the engagement

The scope of the audit

Anamul Huq (M.Z. Islam & Co.) Page 3 of 3