The Stages of an Audit – Appointment - ACCA Audit and Assurance (AA)

Summary

This Open Tuition lecture discusses the critical decision-making process auditors face when considering whether to accept an audit engagement. It highlights the importance of evaluating ethical threats, such as familiarity and self-interest, and ensuring professional competence and independence. The lecture also covers acceptance procedures, the necessity of adequate resources, and the risks associated with auditing, including potential legal implications and the impact on the auditor's reputation. Additionally, it touches on the importance of communication with existing auditors, the role of internal audit, and the drafting of an engagement letter that outlines the responsibilities of both the auditor and the client.

Takeaways

• 🤔 Auditors must carefully consider whether to accept an audit engagement, considering ethical principles and potential threats.
• 👥 Familiarity and self-interest threats, such as being related to a client or heavily reliant on their audit fees, can compromise auditor independence.
• 📑 Acceptance procedures include assessing professional qualifications, legal compliance, and evaluating ethical threats.
• 💼 Auditors need to ensure they have adequate resources, including staff, time, and expertise, to handle the audit without compromising quality.
• 💰 The audit fee should cover the work required to gather sufficient appropriate audit evidence, but 'low-balling' can be a risky strategy.
• 🔍 Investigating the directors' backgrounds and financial histories is crucial to understanding the risks associated with an audit.
• 🏦 The nature of the client's business can pose inherent risks, such as cash-based businesses being more susceptible to fraud.
• 📈 Auditors must be aware of and comply with money laundering regulations, which can have severe legal consequences if not adhered to.
• 🗣️ Communication with existing auditors is essential, and their responses (or lack thereof) can provide insight into potential issues.
• 📝 The engagement letter outlines the responsibilities of both the auditor and the client, serving as a contract and a guide for the audit process.

Q & A

What is the first step an auditor should take before accepting an audit engagement?

The first step an auditor should take is to decide whether or not to accept the audit engagement. This involves considering factors such as ethics, threats to independence, and the potential risks associated with the client.

What are some of the ethical threats that auditors need to consider before accepting an audit?

Auditors need to consider ethical threats such as familiarity, where they might be too close to or related to the client's finance director, and self-interest threats, such as when a significant portion of the audit firm's income is derived from the client.

Why is it important for auditors to evaluate their professional competence and due care before an audit?

Auditors must ensure they have the necessary professional competence and due care to perform the audit to a proper standard. This is crucial for maintaining audit quality and avoiding potential issues with the audit outcome.

What does the term 'low-balling' refer to in the context of audit fees?

Low-balling refers to the practice of quoting an unreasonably low fee to win an audit engagement, possibly with the hope of securing more lucrative work in the future.

How can auditors assess the risk associated with the directors of a company they are considering auditing?

Auditors can assess the risk associated with directors by investigating their backgrounds, checking databases, court records, and company house registrations for any signs of past misconduct or involvement in fraudulent activities.

What is the significance of the accounting reporting framework in the decision to accept an audit engagement?

The accounting reporting framework is significant because it determines the standards and rules the company follows for financial reporting. Auditors must ensure that the framework is acceptable and complies with relevant regulations.

Why is it necessary for auditors to communicate with the outgoing auditors before accepting an engagement?

Communicating with outgoing auditors is necessary to gain insights into any potential issues or concerns from the previous audit, which can inform the decision to accept the engagement and prepare for potential challenges.

What is the purpose of an engagement letter in the audit process?

An engagement letter serves as a contract between the auditor and the client, outlining the responsibilities of both parties, the scope of the audit, and expectations regarding access to records and information.

How does the audit process handle the issue of confidentiality regarding the audit report?

The audit process ensures confidentiality by specifying in the engagement letter that the audit report is intended for the company's members and should not be shared with third parties without the auditor's consent.

What role can internal audit play in the external audit process, and why is it significant?

Internal audit can play a significant role by performing routine parts of the audit, such as testing internal controls and examining transactions. This can help external auditors by reducing the cost and workload, while still ensuring a thorough audit is conducted.