Page 86 - DCOM204_AUDITING_THEORY

Auditing Theory

Notes 3. Establish an understanding of the terms of the engagement (also refer to ISA 210 Terms of
Audit Engagement).

5.3 Client Acceptance and Continuance

Client acceptance and continuance encompasses both deciding on acquiring a new client or
continuation of relationship with an existing one and the type and amount of staff required.
ISQC 1 states that audit firms should establish policies and procedures for the acceptance and
continuance of client relationships. Typical policies and procedures involved in this process are:
1. Evaluate the client’s background;
2. Determine whether the auditor is able to meet the ethical requirements regarding the
client;
3. Communicate with the previous auditor;
4. Determine need for other experts;

5. Select staff to perform the audit and;
6. Obtain an engagement letter.

5.4 New Client

Prior to accepting a new client, the auditor should investigate the client before accepting them.
The auditor should evaluate the client’s standing in the business community, financial stability,
and relations with its previous auditor. The main purpose of investigating a new client is to
ascertain the integrity of the client and the possibility of fraud. The auditor should be especially
concerned with the possibility of fraudulent financial reporting since it is difficult to uncover.
The auditor does not want to expose him or herself to the possibility of legal liability for failure
to detect fraud. If the client has been audited previously, under ISA 300 the new auditor should
contact the previous auditor, in compliance with relevant ethical requirements, in order to
evaluate whether to accept the engagement. Both the new auditor and the previous auditor must
obtain permission from the client before communication can be made because of the
confidentiality requirement in the Auditors Code. The new auditor should be wary of accepting
the client if the client does not give permission for this communication to the new auditor and/
or the previous auditor. The previous auditor in compliance with relevant ethical requirements
is required to respond to the new auditor’s request for information if given permission by the
client. Even when a potential client has been audited previously, the auditor may make other.

!

Caution The auditor should evaluate the client’s standing in the business community,
financial stability, and relations with its previous auditor.

Notes Enquiries done by collecting information from bankers, legal representatives, and
background searches of relevant databases.

5.5 Continuing Clients

Past arguments over the scope of the audit, the type of opinion issued, fees , etc. may give the
auditor pause to reconsider the association with the particular client. The auditor may also

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