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Client Acceptance

Audit Process Model

Phase I: Client Acceptance
Objective:

Determine both acceptance of a client and acceptance by a client.

Decide on acquiring a new client or continuation of relationship
with an existing one and the type and amount of staff required.

Procedures:

(1) Evaluate the clients background and reasons for the audit
(2) Determine whether the auditor is able to meet the ethical
requirements regarding the client
(3) Determine need for other professionals
(4) Communicate with predecessor auditor
(5) Prepare client proposal
(6) Select staff to perform the audit
(7) Obtain an engagement letter

Audit Process Model

Phase II: Planning
Objective:

Determine the amount and type of evidence and review required

to give the auditor assurance that there is no material
misstatement of the financial statements.

Procedures:

(1) Perform audit procedures to understand the entity and its

environment, including the entitys internal controls
(2) Assess the risks of material misstatements of the financial
statements
(3) Determine materiality; and
(4) Prepare the planning memorandum and audit program,
containing the auditors response to the identified risks

Audit Process Model

Phase III: Testing and Evidence
Objective:

Test for evidence supporting internal controls and the fairness of

the financial statements.

Procedures:

(1) Tests of controls

(2) Substantive tests of transactions
(3) Analytical procedures
(4) Tests of details of balances
(5) Search for unrecorded liabilities

Audit Process Model

Phase IV: Evaluation and Reporting
Objective:

Complete the audit procedures and issue an opinion.

Procedures:

(1) Evaluate governance evidence

(2) Perform procedures to identify subsequent events
(3) Review financial statements and other report material
(4) Perform wrap-up procedures
(5) Prepare Matters for Attention of Partners
(6) Report to the board of directors
(7) Prepare Audit report

Learning Objectives

After studying this chapter, you should be able to:

1. Explain what is meant by client acceptance.
2. Describe the seven primary procedures involved in the
client acceptance process.
3. Understand the main reasons for obtaining an
understanding of clients business and industry.
4. Know the sources of client information and the methods for
gathering the information.
5. Discuss the ethical and competency requirements of the
audit team.
6. Know what is required in using the work of another auditor.

Learning Objectives

After studying this chapter, you should be able to:

7. Understand the auditors responsibility in using the work of
an expert.
8. Describe the procedures for communicating with an
existing (predecessor) auditor.
9. Know the contents of a client audit engagement proposal.
10. Express the differences between items covered in an audit
engagement proposal to existing clients and one for new
clients.
11. Explain on what basis audit fees are negotiated.
12. Understand what an audit engagement letter includes and
why its contents are important.

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LO 1:
Explain what is meant by
client acceptance.

Client acceptance phase objectives

Examination of the proposed client to determine if

there is any reason to reject the engagement
(acceptance OF the client) and convincing the client
to hire the auditor (acceptance BY the client)
Decide on acquiring a new client or continuation of
the relationship with and existing client
Determine the type and amount of staff

FAKULTAS EKONOMI DAN BISNIS

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LO 2:
Describe the seven primary
procedures involved in the
client acceptance process.

Client acceptance procedures

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1. Evaluate the clients background and reasons for the

audit.
2. Determine whether the auditor is able to meet the
ethical requirements regarding the client
3. Determine need for other professionals.
4. Communicate with predecessor auditor.
5. Prepare client proposal.
6. Select staff to perform the audit.
7. Obtain an engagement letter.

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LO 3:
Understand the main reasons
for obtaining an
understanding of clients
business and industry.

Knowledge of a clients business

helps auditors

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to evaluate the engagement risks associated with

accepting the specific engagement and
to help the auditor in determining whether all
professional and ethical requirements (including
independence, competence, etc.) regarding this
client can be met.

Preliminary examination of clients

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New and existing clients

visiting their premises,
reviewing annual reports,
having discussions with client's management and staff
accessing public news and public information databases,
usually via the Internet.

For an existing one, prior years' working papers should

be reviewed.
For a new client, consult prior auditors and increase
preliminary information search.

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LO 4: Know the sources of

client information and the
methods for gathering the
information.

Sources of information for client

evaluation

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Evaluate governance, internal controls and

possible risks with client's management and staff
including

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Changes in management, organizational structure, and activities of

the client.
Current government regulations
Current business developments
Current or impending financial difficulties or accounting problems.
Susceptibility of the entitys financial statements to material
misstatement due to error or fraud.(ISA 240 & ISA 315)
Existence of related parties. (ISA 550)
New or closed premises and plant facilities.
Recent or impending changes in technology, types of products or
services and production or distribution methods.
Changes in the accounting system and the system of internal control.

New client review

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publicly available information,

past company financial statements,
reports to stockholders,
government financial reports (e.g., U.S. SEC 10K
report)
company premises via tour
previous auditor relationship

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LO 5: Discuss the ethical

and competency
requirements of the audit
team.

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Ability to meet audit team ethics and

competence

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Independence of auditor
(personal investments, client
business relationships, non-audit
services, unpaid fees)
Litigation
Technical training and proficiency
required in the circumstances
Partner rotation (SOx 5yrs, EU
7yrs, PP 20/2015 5 yrs)

Specific competencies

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On the basis of the specific circumstances of the client

and its industry, the auditor should determine if the
necessary expertise regarding the industry, specific
GAAP issues, or certain non-audit skills are available to
the audit team.
Review existing partner and staff competencies:
knowledge of relevant industries or subject matters;
experience with relevant regulatory or reporting
requirements;
ability to complete the engagement within the
reporting deadline.

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LO 6:
Know what is required in
using the work of another
auditor.

Group engagement partner,

specialist, component auditor

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An outside specialist such as IT, environmental or tax

specialist, may be needed to properly audit the client.
SA 600 applies when an auditor, acting as a group
engagement partner, decides to use the work of a
component auditor in the audit of group financial statements.
Component auditor An auditor who, at the request of the
group engagement team, performs work on financial
information related to a component for the group audit.

The group audit partner is solely responsible for the

direction, supervision and performance of the group audit
engagement and whether the auditors report that is issued
is appropriate in the circumstances.

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LO 7: Understand the
auditors responsibility in
using the work of an expert.

Auditors expert

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SA 620 defines an Auditors expert as an

individual or organization possessing expertise
in a field other than accounting or auditing,
whose work in that field is used by the auditor to
assist the auditor in obtaining sufficient
appropriate audit evidence.

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When using an experts work, the

auditor MUST :

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Determine experts
Competence (professional certifications)
Capabilities
Objectivity

The auditor shall agree, in writing when appropriate, with

the auditors expert:
The nature, scope and objectives of that experts work
The respective roles and responsibilities of the auditor
and that expert
The nature, timing and extent of communication
The need for the auditors expert to observe
confidentiality.

Reference to the auditors expert in

the auditors report

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The auditor shall not refer to the work of an

auditors expert in an auditors report containing an
unmodified (unqualified) opinion unless required by
law or regulation to do so.
If the auditor makes reference to the work of an
auditors expert in the auditors report because such
reference is relevant to an understanding of a
modification to the auditors opinion, the auditor
shall indicate in the auditors report that such
reference does not reduce the auditors
responsibility for that opinion.

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LO 8:
Describe the procedures
for communicating with an
existing (predecessor)
auditor.

Prior auditor- first time engagements

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IESBA Code of Ethics recommends that the new

auditor communicate directly with the previous auditor.
The proposed accountant should request permission
from the client to communicate with existing
accountant.
When the prior accountant receives the
communication, he should ordinarily reply advising of
any reasons why the proposed accountant should not
accept the appointment.
First time engagements require evidence that opening
balances are not misstated, prior balances are
correctly brought forward, and proper accounting
applied. (SA 510)

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LO 9:
Know the contents
of a client audit
engagement
proposal.

LO 10:
Express the differences
between items covered
in an audit engagement
proposal to existing
clients and one for new
clients.

Continuing client audit proposal

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A review on how the auditing firm can add value

Plans for further improvement in value added
A description of the audit team
Fee proposal

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New client audit proposal

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An executive summary
Clients business and audit expectations
Strengths of the audit firm
Audit team
Audit approach
Clients internal auditors
Transition needs
Other services of the audit firm
After service monitoring
Fee details
Appendix

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LO 11:
Explain on what basis
audit fees are negotiated.

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professional fees should be a fair

reflection of

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the skill and knowledge required for the type of

professional services involved
the level of training and experience of the persons
performing the services
the time necessarily to perform services;
the degree of responsibility that performing those
services entails.
No contingency fees

Commissions and referral fees

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If proper safeguards are in place

An auditor may receive a referral fee or
commission.
For example, when she does not provide the specific
service required, a fee may be received for referring a
client to another accountant or other expert.

A auditor may also pay a referral fee to obtain a

client
for example, where the client requires specialist services
not offered by the existing auditor.

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LO 12:
Understand what an audit
engagement letter includes
and why its contents are
important.

Content of engagement letter

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The agreed terms of the audit engagement shall be

recorded in an audit engagement letter or other suitable
form of written agreement and shall include:
(a) The objective and scope of the audit;
(b) The responsibilities of the auditor;
(c) The responsibilities of management;
(d) Identification of the applicable financial reporting
framework; and
(e) Reference to the expected form and content of any reports
to be issued by the auditor and a statement that there may
be circumstances in which a report may differ from its
expected form and content

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Generally the engagement letter

should also include

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Access to all information of which management is

aware that is relevant to the preparation of the financial
statements such as records, documentation and other
matters;
Additional information that the auditor may request
from management for the purpose of the audit; and
Unrestricted access to persons within the entity from
whom the auditor determines it necessary to obtain audit
evidence.

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Recap of this session

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Recap
In accepting/evaluating, considers engagement
risks; ethical requirements and competence.
Auditor need to consider the involvement of
specialist/expert and/or other professionals (i.e.
component auditor, predecessor/prior auditor).
Engagement letter (or other written agreement) is
prepared to document the terms of engagement.

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Further readings

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Selected materials

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Hayes, Wallage, and Gortemaker, Ch. 5, Client Acceptance in Principles

of Auditing an Introduction to International Standards on Auditing, 3rd
Edition , 2014

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