A2 M3

A2 M3 - TERMS OF ENGAGEMENT 1. Audit Committees a. Responsible for the selection and appointment of the independent external auditor b. And reviewing nature and scope of the engagement 2. Sarbanes-Oxley Act (generally issuers/public companies) a. Auditor reports to and is overseen by the client's audit committee 3. Those Charged w/ Governance a. Those who bear responsibility to oversee obligations ("BOD"/"audit committee") b. Auditor REQUIRED to communicate certain matters to those charged w/ governance Client Acceptance and Continuance Auditor should assess the following: o Firm's Ability to Meet Reporting Deadlines o Firm's Ability to Staff the Engagement (experience and availability) o Independence o Integrity of Client Management o Group Audits Preconditions for an Audit Applicable Financial Reporting Framework o U.S. GAAP or IFRS Management Responsibilities o Preparation and fair presentation of the financial statements o The design, implementation, and maintenance of internal control o To provide the auditor with: Access to all information Unrestricted access to persons Management-Imposed Scope Limitation If major audit should NOT accept an engagement o Lack of records = scope limitation Audit Required by Law or Regulation o Entities that get government funding o Audit is permitted, but not required, to accept engagement when there is a management-imposed scope limitation Scope Limitations That Do Preclude Engagement Acceptance o If management scope-limitation result in a qualified opinion OR it is beyond management's control auditor may still accept the engagement Agreement on Audit Engagement Terms Should be documented in a signed engagement letter Typically would NOT include specific audit procedures but overall audit strategy Reduces risk of misinterpretation
Required Contents Objective and scope of the audit Responsibilities of the auditor Responsibilities of management (FS and IC) Inherent limitations and that some material misstatements may NOT be detected Identification of applicable financial reporting framework Reference to the expected form and content of any reports** Other Contents Communication of KAM Timing Expectation that management will provide written representations Use of other auditors/specialists/internal auditors Arrangements w/ predecessor auditor Recurring Audits an engagement for an existing audit client (performed the preceding audit) Revising the Terms of the Engagement o Any change in legal or regulatory requirements o Any revised or special engagement terms o A change in senior management Initial Audits Talk to prior CPA Communication with the predecessor auditor = MANDATORY If client is unwilling to agree consider withdrawing Auditor should make oral or written inquiries (and workpapers) of the predecessor auditor o Info on management integrity o Disagreements w/ management o Reasons for the change of auditors o Communication regarding fraud or noncompliance o Related parties and significant unusual transactions Change in Engagement Change from audit to a compilation or to a review Change must be justified Reasons for Change o Acceptable Change in client requirements or misunderstanding as to the nature of the service to be rendered o Unacceptable (consider withdrawing) Engagement would uncover errors or fraud The client is attempting to create misleading or deceptive financial statements
Scope Limitations (consider withdrawing) o Client refuses to allow correspondence w/ legal counsel o Client refuses to provide a signed representation letter Compilation/Review Report Not Permitted o Cannot be permitted if any of the scope limitations above occur NOTES FROM MC: Do NOT need to review engagement letter from predecessor auditor prior to acceptance If the predecessor auditor refuses to give the current auditor access to documentation current auditor should review the risk assessment of the opening balances of the FS If client request to change the engagement from audit to compilation auditor MUST consider the effort needed to complete the audit, the cost of completing the audit and the reasons for the client's request Contingent fees between the company and the auditor would cause a loss of independence Performance by the auditor of certain non-audit services such as bookkeeping and other services related to the accounting records or financial statements of the audit client are NOT allowable
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