Process of Assurance:

Obtaining an Engagement

Mohammad Salahuddin
Chowdhury, ACA

Process of assurance: Obtaining an

engagement
Obtaining an Engagement
Accountants/ Auditors are often invited to tender for
particular engagements, which mean that they offer a quote
for services, outlining the personnel, usually in competition
with other firms which are tendering at the same time.

Process of assurance: Obtaining an

engagement
Appointment Consideration
Schedule C of ICAB Code of Ethics as well as IFAC Code
of Ethics sets out the rules under which accountants
should accept new appointments.
Before a new client is accepted, the auditors must
ensure that there are no independence or other
ethical issues likely to cause significant problems with
the ethical code.
New auditors should ensure that they have been
appointed in a proper and legal manner.

Process of assurance: Obtaining an

engagement
Appointment Consideration
A practitioner accepts an assurance engagement only
where the practitioners preliminary knowledge of the
engagement circumstances indicates that:
Relevant ethical requirements, such as independence
and professional competence will be satisfied; and
The engagement exhibits all of the following
characteristics:
The subject matter is appropriate ;
The criteria to be used are suitable and are
available to the intended users;
The practitioner has access to sufficient appropriate
evidence to support the practitioners conclusion;

Process of assurance: Obtaining an

engagement
Appointment Consideration

The practitioners conclusion, in the form

appropriate to either a reasonable assurance
engagement or a limited assurance engagement,
is to be contained in a written report; and
The practitioner is satisfied that there is a
rational purpose for the engagement. If there is
a significant limitation on the scope of the
practitioners work, it may be unlikely that the
engagement has a rational purpose.

Process of assurance: Obtaining an

engagement
The nominee auditors must carry out the following procedures
Ensure professionally qualified to act
Consider whether disqualified on legal or ethical grounds, for
example, if there would be a conflict of interest with another
client.
Ensure existing resources adequate
Consider available time, staff and technical expertise
Obtain references
Make independent enquiries if directors are not personally
known.
Communicate with present auditors
Enquire whether there are reasons/circumstances behind the
change which the new auditors ought to know, also as a matter
of courtesy.

Process of assurance: Obtaining an

engagement
Some of the basic factors for consideration are given
below
The integrity of those managing a company will be of
great importance, particularly if the company is
controlled by one or a few dominant personalities.
The audit firm will consider whether the client is likely
to be high or low risk to the firm in terms of being
able to draw an appropriate assurance conclusion in
relation to the client. The following table contrasts
low and high risk clients:

Process of assurance: Obtaining an

engagement
Some of the basic factors for consideration are given
below
Low Risk

High Risk

Good long-term prospects

Poor recent or forecast performance

Well-financed

Likely lack of finance

Strong internal controls

Significant control weaknesses

Conservative, prudent accounting

policies

Evidence of questionable
doubtful accounting policies

Competent, honest management

Lack of finance director

Few unusual transactions

Significant unexplained transactions or

transactions with connected
companies

integrity,

Process of assurance: Obtaining an

engagement
Sources of information about new clients

Enquires of other sources

Bankers, solicitor
Review of documents
Most recent annual accounts, credit rating
Previous accounts/auditors
Previous auditors should be invited to disclose fully all
relevant information
Review of rules and standards
Consider specific laws/standards that relate to
industry

Process of assurance: Obtaining an

engagement
Sources of information about new clients

Prospective auditors should seek the prospective clients

permission to contact the previous auditors. If this
permission is not given, the prospective auditors
should consider carefully the reason for such refusal
when determining whether or not to accept the
appointment. Normally permission will be given, so
the prospective auditors can write to the outgoing
auditors.

Process of assurance: Obtaining an

engagement
Example: Initial Communication with previous/retiring auditor
29 July 2013
Rahman Rahman Huq & Co
Chartered Accountants
Dear Sirs
Ref: ABC Ltd.
We have pleasure in informing you that we have been appointed as auditors of
ABC Ltd. for the year 31 December 2013. Since you were the previous
auditors of the company, we would like to know from you if there is any
professional reason as to why we should not accept the appointment.

Syful Shamsul Alam & Co

Chartered Accountants

Process of assurance: Obtaining an

engagement
Procedures are to be carried out after accepting nomination
The following procedures should be carried out after accepting nomination:
Ensure that the outgoing auditors removal or resignation has been
properly conducted in accordance with national legislation.
The new auditor should see a valid notice of the outgoing auditors
resignation, or confirm that the outgoing auditors were properly removed.
Ensure that the new auditors appointment is valid. The new auditors
should obtain a copy of the resolution passed at the general meeting
appointing them as the companys auditors.
Set up and submit a letter of engagement to the directors of the company.

Process of assurance: Obtaining an

engagement
Procedures are to be carried out after accepting nomination
Where the outgoing auditors have fees still owing by the client, the new
auditors need not decline appointment solely for this reason. They should
decide how far they may go in aiding the former auditors to obtain their
fees, as well as whether they should accept the appointment.
Once a new appointment has taken place, if applicable, the new auditors
should obtain all books and papers which belong to the client from the
outgoing auditors. The outgoing auditors should ensure that all such
documents are transferred, unless they have a lien over the books
because of unpaid fees. The outgoing auditors should also pass any useful
information to the new auditors if it will be of help, without charge, unless
a lot of work is involved.

Process of assurance: Obtaining an

engagement
Agreeing Terms of an Engagement
The auditor shall agree the terms of the audit engagement with
management or those charged with governance, as appropriate.
An engagement letter should be sent to all clients to clarify the
terms of the engagement.
Agreement of audit engagement terms must be in writing.
It must include an explanation of the scope of the audit, the
limitations of an audit and the responsibilities of auditors and
those charged with governance.
Identification of the applicable financial reporting framework for
the preparation of the financial statements.

Process of assurance: Obtaining an

engagement
Agreeing Terms of an Engagement
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.
It may contain other information concerning practical
details of the audit.

Process of assurance: Obtaining an

engagement
Purpose of an Engagement Letter
The purpose of an engagement letter is to:
Define clearly the extent of the firms responsibilities
and so minimize the possibility of any misunderstanding
between the client and the firm.
Provide written confirmation of the firms acceptance of
the appointment, the scope of the engagement and the
form of their report.

Process of assurance: Obtaining an

engagement
Audit Engagement Letter
Auditing standards require that the auditor and the client should agree on
the terms of the engagement. The agreed terms must be in writing and
the usual form would be a letter of engagement.
The auditors should send an engagement letter to all new clients soon
after their appointment as auditors, and in any event, before the
commencement of the first audit engagement. They should also consider
sending an engagement letter to existing clients to whom no letter has
previously been sent as soon as a suitable opportunity presents itself.

Process of assurance: Obtaining an

engagement
Audit Engagement Letter
Auditing standards require that the auditor and the client should agree on
the terms of the engagement. The agreed terms must be in writing and
the usual form would be a letter of engagement.
The auditors should send an engagement letter to all new clients soon
after their appointment as auditors, and in any event, before the
commencement of the first audit engagement. They should also consider
sending an engagement letter to existing clients to whom no letter has
previously been sent as soon as a suitable opportunity presents itself.

Process of assurance: Obtaining an

engagement
Form and Content of Audit Engagement Letter
The form and content audit engagement letters may vary for each client, but they would
generally include reference to the following:
The objective of the audit of financial statements.
Managements responsibility for the financial statements.
The scope of the audit, including reference to applicable legislation, regulations or
pronouncements of ICAB to whom the auditor adheres.
The form of any reports or other communication of results of the engagement.
The fact that because of the test nature and other inherent limitations of an audit, together
with the inherent limitations of any accounting and internal control systems, there is an
unavoidable risk that even some material misstatements may remain undiscovered.

Process of assurance: Obtaining an

engagement
Form and Content of Audit Engagement Letter
Unrestricted access to whatever records, documentation and
other information is requested in connection with the audit.
The agreement of management to make available to the
auditor draft financial statements and any accompanying
other information in time to allow the auditor to complete
the audit in accordance with the proposed timetable.

Process of assurance: Obtaining an

engagement
Form and Content of Audit Engagement Letter
The auditor may wish to include in the letter the following items:
Arrangements regarding the planning and performance of the audit, including
the composition of the audit team.
Expectation of receiving from management written confirmation of
representations made in connection with the audit.
A request for management to acknowledge receipt of the audit engagement
letter and to agree to the terms of the engagement outlined therein.
The agreement of management to inform the auditor of facts that may affect
the financial statements, of which management may become aware during the
period from the date of the auditors report to the date the financial statements
are issued.

Process of assurance: Obtaining an

engagement
Form and Content of Audit Engagement Letter
The auditor may wish to include in the letter the following items:
(cont.)
Description of any other letters or reports the auditors expects to
issue to the client.
The confidentiality of any reports issued and if relevant, the terms
under which they can be shared with third parties.
The basis on which fees are computed and any billing arrangements.

Process of assurance: Obtaining an

engagement
Form and Content of Audit Engagement Letter
When relevant, the following points could also be made in the audit
engagement letter:
Arrangements concerning the involvement of other auditors and
experts in some aspects of the audit.
Arrangements concerning the involvement of internal auditors
and other staff of the entity.
Arrangements to be made with the predecessor auditor, if any, in
the case of an initial audit.
Any restriction of the auditors liability when such possibility
exists.
A reference to any further agreements between the auditor and
the client.
Any obligations to provide audit working papers to other parties.

Process of assurance: Obtaining an

engagement
Form and Content of Audit Engagement Letter
An example of an audit engagement letter is set out in
the Appendix 1 of BSA 210.

Microsoft Office
Word 97 - 2003 Document

Process of assurance: Obtaining an

engagement
Audit Engagement Letter for recurring audit
On recurring audits, the auditor should consider whether
circumstances require the terms of the engagement to be
revised and whether there is a need to remind the client of
the existing terms of the engagement.
The auditor may decide not to send a new audit
engagement letter or other written agreement each period.
However, the following factors may make it appropriate to
send a new letter to revise the terms of the audit
engagement or to remind the entity of existing terms:

Any indication that the entity misunderstands the objective and scope of
the audit.

Process of assurance: Obtaining an

engagement
Audit Engagement Letter for recurring audit (cont.)
Any revised or special terms of the audit
engagement.
A recent change of senior management.
A significant change in ownership.
A significant change in nature or size of the
entitys business.
A change in legal or regulatory requirements.
A change in the financial reporting framework
adopted in the preparation of financial statements.
A change in other reporting requirements.

Any Questions ?