2.1 Overview of the Audit Process Introduction and Pre Engagement Activities

Summary

This video script delves into the financial statements audit process, emphasizing a risk-based approach with three key phases: risk assessment, risk response, and conclusion and reporting. It starts with pre-engagement procedures, discussing client acceptance and continuance, and the importance of evaluating management's integrity. The script also highlights the necessity of an engagement letter to define the audit's scope and terms, and touches on considerations for recurring audits and changes in engagement terms.

Takeaways

• 📘 The script introduces a module focused on the financial statements audit process, emphasizing a deeper dive into the subject beyond the initial overview.
• 🔍 It highlights the importance of the risk-based audit approach, which is central to the financial statement audit process and consists of three phases: risk assessment, risk response, and conclusion and reporting.
• 🤔 The video discusses the pre-engagement phase, which includes client acceptance and continuance, and stresses the need for auditors to evaluate their competence, ethical requirements, and the client's auditability.
• 👤 The importance of assessing management's integrity is underscored, as it is critical to avoid complications during the audit engagement and to ensure a successful audit process.
• 📑 The necessity of an engagement letter is explained, which serves as a formal written agreement between the auditor and the client, outlining the terms of the engagement and minimizing misunderstandings.
• 💼 The script covers the contents of an engagement letter, which include the audit's objective, management's responsibilities, the financial reporting framework, and the scope of the audit, among other details.
• 🔄 The discussion touches on the conditions under which a new engagement letter may be required, such as changes in senior management, the nature or size of the client's business, or the financial reporting framework.
• 🚫 It advises on how to handle situations where a client requests a change in the terms of engagement, suggesting that auditors should only agree to changes if the reasons are justifiable and refuse or withdraw if they suspect the client is trying to avoid an unfavorable audit opinion.
• 👥 The video script also addresses the considerations for auditing components, such as subsidiaries or divisions, and the factors that may influence whether a separate engagement letter is needed for them.
• ⏰ The presenter acknowledges feedback about the length of previous videos and commits to keeping the discussion within 25 to 30 minutes per segment to enhance understanding and retention of concepts.
• 📈 The next phase of discussion will focus on audit planning, including topics like materiality, which is a significant aspect of the audit process and will be covered in subsequent videos.

Q & A

What is the main focus of the module discussed in the video script?

The main focus of the module is to provide an overview of the financial statements audit process, including client acceptance, audit planning, and the risk-based audit approach.

What is the significance of the risk-based audit approach in the financial statement audit process?

The risk-based audit approach is significant as it guides the auditor through three distinct phases: risk assessment, risk response, and conclusion and reporting, ensuring a structured and comprehensive audit.

What are the three phases of the risk-based audit approach?

The three phases of the risk-based audit approach are risk assessment, risk response, and conclusion and reporting.

What does pre-engagement procedures involve in the context of auditing?

Pre-engagement procedures involve client acceptance and continuance, evaluating the auditor's competence, ethical requirements including independence, and the capabilities to perform the audit engagement.

Why is evaluating the integrity of a client's management important in the auditing process?

Evaluating the integrity of a client's management is crucial to avoid complications during the audit engagement and to ensure the reliability and credibility of the audit findings.

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

An engagement letter serves as a formal written agreement between the auditor and the client, outlining the objectives, scope, responsibilities, and terms of the audit engagement to minimize misunderstandings and legal liabilities.

What factors determine whether a separate engagement letter should be sent to the components of an organization?

Factors determining the need for a separate engagement letter for components include who appoints the auditor, whether a separate audit report is issued, legal requirements, the extent of work performed by other auditors, and the degree of ownership and independence of the component's management.

Why might an auditor consider discontinuing an engagement with an existing client?

An auditor might consider discontinuing an engagement with an existing client due to evidence of management lacking integrity, difficulty in working with client personnel, inability to negotiate an acceptable fee increase, or if the client requires specialized services that the audit firm cannot provide.

What is the significance of discussing the company's management with the predecessor auditor?

Discussing the company's management with the predecessor auditor is significant for understanding the reasons for the change in auditors, assessing management's integrity, and identifying potential disagreements that may impact the audit.

How can an auditor assess the auditability of a prospective client?

An auditor can assess the auditability of a prospective client by evaluating the adequacy of accounting records and the quality of the client's internal controls, which are the responsibilities of the prospective client.

Outlines

00:00

📘 Introduction to the Financial Statements Audit Process

Christine, the auditing conversation partner, reintroduces herself and announces the focus of the module: an in-depth exploration of the financial statements audit process. She highlights the shift from a general overview of auditing to a detailed examination of the process, including client acceptance, audit planning, supervision, and monitoring. Acknowledging feedback on video length, Christine commits to keeping discussions concise, aiming for 25 to 30 minutes per segment. The module's agenda is outlined, emphasizing the risk-based audit approach with its three phases: risk assessment, risk response, and conclusion and reporting.

05:02

🔍 Pre-Engagement Procedures and Client Acceptance

The second paragraph delves into pre-engagement procedures, which include client acceptance and continuance. It discusses the importance of evaluating the auditor's competence, ethical requirements, including independence, and the auditor's capabilities in terms of time and resources. Christine addresses hypothetical scenarios where an auditor might lack industry-specific experience but still possesses the foundational knowledge to perform an audit. She stresses the necessity of understanding the client's industry and business, evaluating the auditability of the prospective client, and assessing management's integrity. The process of communicating with predecessor auditors using the mnemonic 'RID' (Reasons for the change, Integrity, and Disagreements) is also covered.

10:04

🤔 Evaluating Client Management's Integrity and Auditability

Christine continues the discussion on the importance of evaluating a client's management integrity and the auditability of the client's operations. She suggests methods such as reviewing financial statements, communicating with the predecessor auditor, and engaging professionals for background checks. The paragraph also covers the considerations for client continuance, including reasons for discontinuing an engagement, such as evidence of management lacking integrity or difficulty in working with client personnel. The decision to continue or accept an engagement hinges on reaching an agreement with the client on the terms of the engagement.

15:05

📑 The Significance of Engagement Letters in Auditing

The fourth paragraph emphasizes the role of engagement letters in formalizing the agreement between the auditor and the client. It outlines the contents of an engagement letter, which include the audit's objective, management's responsibilities, the financial reporting framework, the scope of the audit, and the form of reports. The paragraph also addresses the circumstances under which a new engagement letter is necessary, such as changes in senior management, the nature or size of the client's business, or the financial reporting framework. The importance of minimizing misunderstandings and outlining the parameters of the audit is highlighted.

20:06

🔄 Handling Changes in the Terms of Engagement

Christine discusses the circumstances that may prompt changes in the terms of engagement, such as changes in client needs or misunderstandings. She advises on how to handle such changes, emphasizing the importance of evaluating the reason behind the client's request. If the reason is justifiable, the auditor should agree to the change and proceed with the new engagement without mentioning the old one. However, if the reason is not justifiable, the auditor should continue with the original engagement or withdraw if the client refuses. The paragraph also touches on the need for a new engagement letter when there are significant changes in the client's business or reporting framework.

25:08

🚀 Wrapping Up Pre-Engagement and Looking Ahead to Audit Planning

In the final paragraph, Christine concludes the discussion on pre-engagement procedures and looks forward to the next phase, which will cover audit planning and materiality. She encourages viewers to take notes to capture the concepts discussed and hints at the exciting content to come in the next video. The paragraph serves as a transition, summarizing the completion of the first phase and preparing the audience for the in-depth discussion on audit planning.

Keywords

💡Auditing

Auditing refers to the systematic review and evaluation of a company's financial statements, internal controls, and overall financial reporting process to ensure accuracy, compliance with accounting standards, and the absence of fraud. In the video, auditing is the central theme, with a focus on the financial statements audit process, emphasizing its importance in providing assurance to stakeholders.

💡Financial Statements Audit Process

The financial statements audit process is a structured approach to examining and verifying a company's financial records. It involves several stages, including planning, risk assessment, evidence gathering, and reporting. The script discusses this process in the context of a risk-based audit approach, highlighting its significance in the auditing profession.

💡Risk-Based Audit Approach

A risk-based audit approach is a methodology that focuses on identifying and assessing risks of material misstatement in the financial statements. The video script describes this approach as having three distinct phases: risk assessment, risk response, and conclusion and reporting. This approach is fundamental to the audit process discussed in the video.

💡Pre-Engagement Procedures

Pre-engagement procedures are activities performed by auditors before commencing an audit engagement. The script mentions these procedures in the context of client acceptance, which includes evaluating the auditor's competence, ethical requirements, and the auditability of the prospective client.

💡Client Acceptance

Client acceptance involves the decision-making process regarding whether to take on a new client or engagement. The video script discusses factors such as the auditor's competence, ethical considerations, and the client's industry experience as part of this process.

💡Ethical Requirements

Ethical requirements pertain to the professional standards that auditors must adhere to, including maintaining independence from clients to ensure unbiased auditing. The script emphasizes the importance of these requirements, especially in evaluating client relationships and potential conflicts of interest.

💡Management's Integrity

Management's integrity refers to the honesty and ethical behavior of those in charge of a company. The video script stresses the importance of assessing this quality when considering client acceptance, as it can significantly impact the audit process and the auditor's ability to perform their duties effectively.

💡Engagement Letter

An engagement letter is a formal written agreement between the auditor and the client that outlines the terms of the audit engagement. The script describes its contents, purpose, and importance in minimizing misunderstandings and establishing the expectations for both parties involved in the audit.

💡Audit Planning

Audit planning is the initial phase of the audit process where the auditor determines the scope, strategy, and methods for conducting the audit. The script mentions that audit planning takes up a significant portion of the discussion, indicating its importance in setting the stage for a successful audit.

💡Materiality

Materiality in auditing is the threshold at which information is considered significant enough to influence the decisions of users of financial statements. Although not explicitly defined in the script, the concept is alluded to as a critical aspect of audit planning and risk assessment.

💡Recurring Audits

Recurring audits refer to audits performed on an ongoing basis for the same client over multiple periods. The script discusses the necessity of revisiting the engagement letter for recurring clients under certain conditions, such as changes in senior management or the nature of the client's business.

Highlights

Introduction to the financial statements audit process, emphasizing the transition from an overview to a deeper dive.

Explanation of the risk-based audit approach as the core of the financial statement audit process.

Discussion of the three distinct phases of the risk-based audit approach: risk assessment, risk response, and conclusion and reporting.

Importance of pre-engagement procedures, including client acceptance and continuance, and their role in the audit process.

Criteria for auditor competence, ethical requirements, and independence in accepting or continuing client engagements.

Assessment of the auditor's capabilities and the auditability of the prospective client, including the adequacy of accounting records and internal controls.

Emphasis on evaluating management's integrity as a critical factor in client acceptance and continuance decisions.

Process of communicating with predecessor auditors using the mnemonic RID (Reasons for the change, Integrity, Disagreements) to assess client management.

Strategies for conducting background investigations on prospective clients to ensure their integrity and auditability.

The role of engagement letters as formal contracts between the auditor and client, outlining the terms and expectations of the audit engagement.

Contents of an engagement letter, including audit objectives, management responsibilities, and the scope of the audit.

Considerations for sending separate engagement letters to components of an organization, such as subsidiaries or divisions.

Guidelines for recurring audits and when to issue a new engagement letter for existing clients.

Factors influencing the decision to agree to or refuse changes in the terms of an audit engagement, including client's motives and justifications.

Implications of changing the level of assurance from an audit to a review and the auditor's response to such requests.

The importance of managing client expectations and minimizing misunderstandings through clear communication in engagement letters.

Strategies for handling situations where the client requests a change in engagement to avoid a potential modification of the audit opinion.

Conclusion of the pre-engagement phase and a preview of the next phase, which will cover audit planning.

Transcripts

hi there I'm back it's me again

Christine your auditing thei

conversation partner did you miss me now

if you have been paying close attention

to the previous videos that we have had

particularly the first module on the

introduction to audit Insurance then you

might have notied that we mentioned

something about how we gave an overview

to auditing but not really the audit

process yet well surprise surprise in

this module we are finally going to give

an overview of the fin financial

statements audit process so this will no

longer be simply skimming the surface as

to what auditing is but we're finally

going to take a deeper dive into what

the financial statement audits

statements audit process is like so if

you will it's kind of like taking our

bolang Crystal our crystal ball and

taking a peek into your future as

external Auditors and what do you expect

to do when you finally perform an

external FS audit now truth be told if

we were to discuss each phase in the

overview then we would have if we were

going to discuss it thoroughly then we

would have already effectively discussed

the entirety of the auditing Theory

syllabus but then of course that would

be a bit too overwhelming so to help

things to help make things more

digestible we're going to give a special

focus on client acceptance audit

planning supervision and monitoring now

before we jump into our discussion I

also do listen to your feed feedback and

one of the things that I have received

one of the feedbacks that I have

received is that the lengthier videos

like the previous one we had which ran

for about an hour aren't really as

effective as we would have hoped it to

be so therefore we're going to do

something different in this module for

each of the segments we are having for

this module we're trying to I am going

to try and limit our discussion to 25 to

30 minutes hopefully that will be better

and that will assist you better in terms

of the ret of the concepts so are you

excited because I sure am let's take a

look at how we're going to divide our

discussion for this modu so these

essentially are the topics we're going

to give an overview of the fs audit and

of course we're going to give the

overview of the audit process client

acceptance and audit planning would go

into the overview of the audit process

together with pre-engagement procedures

scope and purposes of audit planning now

honestly audit planning takes up a bulk

of the discussion and our conversation

here and then finally cap it off with

Direction supervision and review so let

us start with the overview of the audit

process now whenever we talk about the

fs audit process we think of these

phases and yes there is a reason why the

phases are arranged that way we arranged

the phases this way because now might be

a good time to tell you about the

risk-based audit approach our FS audit

process Embraces what we call the

risk-based based audit approach and at

the Hallmark at the core rather of a

risk-based audit approach are actually

three distinct phases how many distinct

phases three the first distinct phase is

risk assessment and when we perform risk

assessment that is where pre-engagement

procedures audit planning and of course

the risk assessment procedures would

belong too now once the auditor has

assessed the risks meaning to say

identified and evaluated the risks then

the auditor will of course respond

respond to the risk right once we have

evaluated something we don't just sit

back relax and enjoy but we respond to

the risk and finally after the process

of responding where audit evidence

Gathering procedures will play the main

character role then the auditor will of

course complete the audit issue the

audit report and perform post audit

responsibilities this is the phase we

were refer to as conclusion and

Reporting so essentially the three

phases of the risk-based audit approach

is risk assessment risk response and

conclusion and Reporting and all of

these steps or phases fall distinctly

into each of the three distinct phases

as well of the risk-based audit approach

so where do we begin well they do say

let's start at the very beginning it's a

very good place to start so we get to

talk about pre-engagement procedures

first when we think about pre-engagement

procedures as the term would suggest pre

that means it happens before the actual

engagement we essentially look at client

acceptance and when we say client

acceptance then this means either

accepting a new client or it could be

accepting an old client an existing

client for a new engagement now this

section will also talk about client

continuance whereby we think about an

existing client with the same engagement

and as to whether we will continue or

not now whenever the auditor decides

whether to accept or to continue a

client the auditor must evaluate and

look at the number of things such as for

example the auditor must evaluate his or

her competence we must remember that we

are not allowed to accept engagements

where we are not competent to perform

them okay another is ethical

requirements and ethical requirements

will of course be anchored deeply into

the code of ethics and it is at this

point where we get to remind ourselves

of the requisite for Independence we

have to examine the possible

relationship we'll be having with this

client and if there will be no

violations to the ethical requirements

most especially that on Independence the

auditor must also look into the

capabilities of the auditor meaning to

say does he or she have the time and the

resources to finish the said engagement

so at the onset the auditor does a

self-reflection

now there are often situations that are

being asked particularly if this were

you know a classroom underg discussion

and perhaps your auditing Theory teacher

might might have asked you about what if

there is a prospective client that has

visited you in your office now the

client wants to get you for you know an

external FS audit engagement but then it

just so happened that this client is

working on an industry that you have

never had any experience exp erience

before let's just say for example the

client is a school it's an educational

institution and so far all of your

existing clients are into the

merchandising buy and sell industry and

you have never audited a school or an

educational institution or something

similar ever in the past you have never

had an experience auditing a school in

the past and then most likely the

question would be could you accept the

engagement would you consider accept the

audit engagement considering that the

industry where this prospective client

belongs to is something that you have

never experienced yet now particularly

looking into the requirement of the

auditor to evaluate its competence the

question now is will you accept the

engagement or can you accept the

engagement now the long and short answer

to that

is yes you may and then some students

may ask but miss does it not mean that I

am not competent to perform the audit

because I have never experienced

auditing that industry ever now take

note that what is required for you is to

have that competence to perform the

audit by virtue of you being a certified

public accountant and by virtue of you

being in public practice are you

competent to perform the audit

engagement the answer of course is yes

yes you are you already have the basic

competence to perform the auditing

engagement but then miss how about the

industry I have never audited that

industry ever in the past and so

therefore I am not yet competent well

guys the good news is you could always

acquire that the important thing is the

very Foundation do you know how to

conduct an audit are you qualified to

conduct an audit if your answer to that

is yes then you can just acquire the

necessary understanding of the client's

industry and business later on but at

the end of the day the long and short

answer to it is yes you may accept such

engagement provided of course there are

no violations of the ethical

requirements and you have the

capabilities to perform the audit

engagement okay but our evaluation does

not just stop there the auditor should

also evaluate the auditability of the

prospective client do you remember in

our discussion regards an appropriate

subject matter we said that for a

subject matter to be appropriate it must

be identifiable it must be measurable

and it must be testable in fact one of

the elements of an assurance engagement

is for you to be able to get sufficient

and appropriate evidence so you need to

determine can I audit this client is the

prospective client auditable and what do

we look at when we decide whether it's

aable or not well two things determine

the adequacy of accounting records and

the quality of the client's internal

controls both of which by the way are

the responsibility of the prospective

client but in order for us to perform an

audit we need to know are there records

does the client have a system of

internal control in place if the client

gets a check mark for both then we may

consider accepting the client and or the

engagement and then most importantly we

need to evaluate Management's

Integrity I cannot stress this enough do

not associate yourselves with clients

who lack Integrity because then things

will become very complicated once you're

already in the engagement once you have

already signed the contract and then at

that moment you realize uhoh this client

has questionable Integrity it's going to

get more complicated so from the very

start filter out clients with

questionable

Integrity assess evaluate client

Management's integrity and how do you do

that sometimes it's easier said than

done right but then how do you do that

well you can review the company's

financial statements you can discuss the

company's manage management with the

predecessor auditor or those which we

call the ex auditor now as a successor

auditor if you're the auditor is about

to receive that client or to receive

that engagement do you know that it is

your responsibility to initiate

communication with the ex auditor or the

predecessor auditor but then of course

because we are all bound by the ethical

requirement of confidentiality this

communication must receive the blessing

of the client first so as the incoming

auditor or the new auditor you will have

to ask permission from the client okay

you will have to inform the client that

you're going to communicate with the ex

auditor or the predecessor auditor if

the client gives the go signal then you

will be free to talk to each other okay

but if the client does not give the go

signal well wouldn't that be considered

as a red flag why wouldn't the client

let you talk to the ex right but then

let's think about this conversation

imagine yourselves maybe in a coffee

shop or having lunch together with the

ex auditor what are the things you're

going to talk about now would that be an

awkward conversation I don't know but

what are the things you're going to talk

about well essentially three things and

we summarize these three things by the

pneumonic rid r i d rid essentially we

want to know why were you gotten rid of

okay so R stands for reasons for the

change you have to ask why things didn't

work out for them because the reason why

things didn't work out for them might

very well be the reason why things will

not work out for you in the future what

do we mean by this one say for example

the reason for the change has something

to do with a disagreement regards how to

apply an accounting standard whether or

not you are the auditor then the

accounting standards remain the same

right so if they disagreed with that

then most likely they will also disagree

with you on that because we talking

about the accounting standards and

accounting standards do not differ from

auditor to auditor okay so then this

gives you an idea of why things didn't

work out for them of course there are a

lot of valid reasons why there has to be

a parting of the ways right it's

possible that there might be

disagreements with regards to fees or

maybe the client needs services that the

ex- auditor cannot provide and so

therefore they're looking for another

one but at the end of the day you need

to know what are the reasons for the

change you also need to ask letter I I

stands for integrity you have to ask

about the Integrity of management and

letter D for rid letter D would stand

for disagreements that they may have

with management okay so these are the

things you're going to talk about with

the predecessor or the ex auditor you

may also want to discuss the company's

management with members of the financial

Community like maybe creditors Bank

institutions or some other stakeholder

olders that might give you an insight as

to whether management has Integrity

consider engaging professionals or

investigators to evaluate the principles

associated with the prospective client I

happen to know that some audit firms do

this one it's kind of like a background

investigation into a prospective client

and obtain credit reports when deemed

necessary so all of these things

hopefully will give you an idea as to

whether the client's management has

integ

we have to be on the lookout for example

for you know negative um news or perhaps

too aggressive overly aggressive uh

stand with regards how to apply gray

areas in the accounting principles that

would also give you an idea as to the

Integrity of management now for client

continuance like I mentioned there might

be valid reasons why you wish to

discontinue an engagement with an

existing client such as for example of

course if there is evidence indicating

that a client's management May lack

Integrity then best for you to exit Okay

so difficulty in working with client

Personnel we have to remember as well

that part of Management's responsibility

is to ensure that we are able to perform

our audit and so if management somehow

or if the Personnel of that client

somehow seems to be actively working

against you it may also be a reason for

you to dis discontinue the engagement or

the inability to negotiate an acceptable

increase in the fee yes that is a valid

reason for you to discontinue the

engagement or if the client needs

specialized services that the current

audit firm is unable or unwilling to

provide these are reasons for why

clients discontinue or Auditors

discontinue with uh the engagement no of

their existing clients now once the

auditor has made the decision to

continue or to accept then the auditor

and the client must reach an agreement

okay the terms of the engagement should

be reached or an agreement with regards

the terms of the engagement should be

reached with the client preferably

through the auditor about the

Professional Services desired and an

engagement letter is of course prepared

now an engagement letter stands as like

the contract between the auditor and the

prospective client and this is to be

sent preferably before the commencement

of the engagement so like what we have

mentioned it's a formal written

agreement between the CPA firm and the

client for the conduct of audit and

related Services it's a written contract

because it's a letter so it must be in

writing it's a written contract between

the auditor and the client there is a

need to utilize engagement letters in

order to minimize understandings because

sometimes the client may have a

different idea as to what an audit

entails from that what the auditor

expects no or what the auditor can

actually offer so therefore the engage

ment letter can provide no this Avenue

to minimize misunderstandings this would

also alert the client as to the purpose

of the engagement and the role of the

external auditor and it will help

minimize legal liabilities for services

that were neither contracted for nor

perform so the engagement letter will

contain the details of the engagement

and will attempt to outline important

things relating to the scope of the

engagement what are the parameters with

which the auditor will conduct the said

engagement so the these are the contents

of an engagement letter they are quite a

lot so don't get too overwhelmed but

it's important that we are familiar with

them because sometimes the multiple

choice questions would ask something

like the following are the contents of

an engagement letter except okay so

let's take a look at the contents of the

engagement letter of course we have to

put there the objective of the audit and

we have to make sure that management

would understand what are the

responsibilities

of management for the fs to ensure that

there will be no misunderstandings no

along the way we also outline or we

mention the financial reporting

framework adopted by Management in

preparing the fs because this will

become the criteria that we use when we

evaluate the subject matter the subject

matter information we of course put in

the engagement letter the scope of the

audit like I mentioned what are its

parameters the form of any reports or

other communication of results uh of the

engagement other than the audit report

will there be other reports that we

expect to submit to management the fact

that there is an unavoidable risk that

even some material misstatement May

remain undiscovered so this is one way

for the auditor to alert management of

the very concept of audit risk right

it's very possible it's possible that

there may still be misstatements which

our audit may not be able to able to

uncover this is also where we outline

that management should give us

unrestricted access to records

documentation people and others and also

what is Management's responsibility for

internal control included also in the

engagement letter are Arrangements

regarding planning and performance of

the audit and an expectation of

receiving from management written

confirmation of representations made now

the written confirmation of

representations made we normally ask for

Management near the end of the audit but

at least management knows at the very

start that we will be asking this for

from them the request for the client to

confirm the terms of the engagement by

acknowledging the receipt of the

engagement letter description of any

other letters or reports that you expect

to issue to the client similar to the

form of any reports or other

communication that we mentioned a while

back and then of course the basis on

which the fees are computed and any

billing Arrangements the last one

perhaps being where you would be most

interested to look into but yes fees and

billing is included in the engagement

letter now very quickly let's talk about

the audit of components and what is its

impact or what what do we need to know

with regards audit of components in the

context of Engagement letters now a

component is essentially a subsidiary a

branch or a division the big question

now is should you send a separate

engagement letter to the components the

answer is it will depend it will depend

on certain factors such as who appoints

the auditor of the component

is a separate audit report to be issued

on the component okay are we legally

required to send a separate engagement

letter to the branch the subsidiary or

the division what is the extent of any

work performed by other Auditors what is

the degree of ownership by the parent

what is the degree of independence of

the components management and so you see

whether we send a separate engagement

letter to the component will depend on

these factors now we also get to talk

about recurring audits do you need to

send an engagement letter to a recurring

client an existing client for recurring

audits the answer is you don't actually

need to send an engagement letter every

year but you might find the need to send

a new one if you find the following

things for example if there is an

indication that the client has

misunderstood the objective and scope of

the audit you may want to spend send

rather a new engagement letter just to

ensure that they understand things

clearly or if there are any devised

special terms of the

engagement or take note of this if

there's a recent change in Senior

Management board of directors or a

change in the ownership of the business

take note that the recent change must

happen in Senior Management bods or the

ownership of the business that being

said if there is simply a change in the

staff or the employees of your client

who do not occupy a senior role then

there's no need for you to send a

separate or a new engagement letter but

once the changes involve Senior

Management upwards there may be a need

for you or you must send a new

engagement letter to ensure that you

guys still agree on the same terms if

there's a significant change in the

nature or size of the client's business

say for example from uh sole

proprietorship the client has now

decided to go into the corporate setup

so send a new engagement letter and of

course if you are legally required to do

so then by all means know if the law so

requires we send a new engagement letter

or if there's a change in the financial

reporting framework adopted by

Management in preparing the fs in other

words when the criteria has changed so

for example previously the client made

use of IFRS for smes and now they are

going to transition to full IFRS then

send a new engagement letter now what if

there are changes in the terms of the

engagement what what would you do okay

so for example you were ini ially

contracted for an audit and the client

suddenly told you well not necessarily

suddenly but then the client told you

you know what auditor I just realized I

I don't want an audit engagement anymore

can we just you know can you just do a

review so there is a change from a

higher level of assurance to a lower

level of assurance will you agree okay

so well again the answer to that is it

depends what is the reason for the

client's decision to change the

engagement if you find the reason to be

justifiable then by all means agree to

the change and do not make mention of

the old engagement because you have

already agreed so when you agree with

the client that there really is a need

to change the engagement to a lower

level of assurance then do the new

engagement proceed with the new

engagement move on do not mention the

previous engagement so as Not to cause

confusion on the readers of your report

okay unless of course the new engagement

is agreed upon procedures because if

it's agreed upon procedures you will

have to mention the previous procedures

but if it's not agreed upon please do

not make mention of the past past is

past okay that is if you have agreed to

the change in the term however what if

you do not find the reason to be

justifiable what if somehow you sense

that the client is simply requesting for

a change in engagement in order to avoid

a possible modification of the audit

opinion what if the client senses that

you're are going to give give a

qualified or adverse opinion and because

of that the client simply ask you to

change the engagement to agreed upon so

that you will not be able to give an

opinion and because of that you are not

convinced that there is a reason for the

change in engagement what will you do

well of course you refuse the change in

engagement you continue with the

original engagement now if you are not

allowed to continue with the original

engagement then withdraw from the

engagement so in short will you agree to

the change in the terms of Engagement it

depends if the reason is justifiable

such as for example the client does not

anymore need an audit then accept the

change in the terms of the engagement

then continue or proceed with the new

engagement do not mention the old unless

it's agreed upon but if you do not if

you're not convinced with the reason

given by the client you don't think it's

justifiable continue with the old

continue with the original if the client

refuses or does not allow you to

continue with the original

then withdraw from the engagement okay

so like what we have mentioned no there

may be reasons may prompt a change that

would prompt a change in the engagement

like change in circumstances there may

be a misunderstanding or a restriction

on the scope whether imposed by

management or caused by circumstances

and like what we have said carefully

consider the re the reason given for the

request particularly what the

implication of this in the scope of your

engagement all right so I think we have

reached 25 minutes and thankfully we

have completed already the first phase

which is pre-engagement now the next

phase is a bit lengthy there are a lot

of things to discuss because this is

also where we're going to talk about

materiality so I hope that you are you

still have the energy you should you

should have the energy because the next

phase is going to be exciting but

perhaps what you can do you could end

this video right here and before

starting the next video you may want to

take down some notes first so as to

capture the concepts we have just

discussed all right so I hope to see you

in the next video where we will discuss

audit planning