ROMANTICO, QUEENIE JANE E.

BBF

DECEMBER 14, 2015

CASES:
1. REQUIRED:
a. What information should Argante and Tan have obtained during their
inquiry of the predecessor auditor prior to acceptance of the
engagement?
Once permission of the client is obtained, the incoming auditor should inquire
into matters that may affect the decision to accept the engagement. This
includes the questions regarding:
The predecessor auditors understanding as to the reasons for the
change of the auditors.
Any disagreement between the predecessor auditor and the client
Any facts that might have a bearing on the integrity of the prospective
clients management.
Any other information that may help auditor in deciding whether
accepting or not the engagement
b. Describe what other matters Argante &Tan would generally have
included in the engagement letter.
The agreed terms of the audit engagement shall be recorded in an audit
engagement letter or other suitable form of written arrangement and shall
include:
The objective and scope of the audit of the financial statements
The responsibilities of the auditor
The responsibilities of the management
Identification of the applicable financial reporting framework for the
preparation of the financial statements; and
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.
The fact that because of the limitations of the audit, there is an
unavoidable risk that material misstatements may remain
undiscovered.
The responsibility of the client to allow the auditor to have unrestricted
access to whatever records, documentation and other information
requested in connection with the audit.
In addition, the auditor may also include the following items in the
engagement letter
Billing arrangements
Expectations of receiving management representation letter
Arrangements concerning involvement of others

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BBF

DECEMBER 14, 2015

Request for the client to confirm the terms of engagement.

2. REQUIRED:
a. List the items that should be included in the typical engagement letter.
The name and address of the person or persons who retained the
auditor to perform the auditing services.
An opening paragraph that confirms the understanding of the auditor
and the client.
A summary of significant events that lead to the retention of the
services of the auditor.
A general description of the CPA firm that will conduct the examination.
A statement that the examination will be performed in accordance with
generally accepted auditing standards.
A description of the scope of the services to be rendered, which should
establish the nature of the engagement.
Any scope restrictions or special limitations and their effect on the
auditors report.
A statement regarding the auditors responsibility for the detection of
fraud.
An indication of the possible use of client personnel in connection with
the audit work to be performed.
A statement that the auditor will provide a management letter if
required in the circumstances.
The method and timing of billings as well as billing rates and fee
arrangements.
Space for the client representatives signature, which indicates
acceptance of the letter and the understandings, therein
b. Describe the benefits derived from preparing an engagement letter.
Preparation of engagement letter is part of the preliminary engagement
activities which should be performed at the beginning of the current audit
engagement to help ensure that the auditor has considered any events or
circumstances that may adversely affect the auditors ability to plan and
perform the audit engagement to reduce audit risk to an acceptably low level.
It also helps to prevent misunderstanding that may occur between auditor and
client. And also to ensure that there are no issues with management integrity
that may affect auditors willingness to continue the engagement. It also

Helps establish an understanding between client and auditor of the

terms of the engagement and the nature of the work.
Helps avoid disputes over the audit fee.

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BBF

DECEMBER 14, 2015

Helps avoid legal liability assertions based on failure to do work that

the CPA may not have contemplated or agreed to do.
Serves as a reference document when preparing for future
engagements

c. Who should prepare and sign the engagement letter?

The engagement letter is prepared by the auditor and is also signed by him
and by management of the client.
d. Why should engagement letter be sent?
It is the interest of both auditor and the client that the auditor sends
engagement letter in order to:
Avoid misunderstandings with respect to the engagement.
Document and confirm the auditors acceptance of the appointment.
e. Why should engagement letter renewed periodically?
Obviously, the engagement letter will be most useful in clarifying
misunderstandings on a first engagement. But it is desirable that the letter be
renewed periodically. Client personnel or the nature of the engagement may
change, and the resubmission of the letter gives both parties an opportunity to
review the circumstances. Accordingly, for recurring examinations of financial
statements, it is appropriate to prepare an engagement letter at the start of
each examination. For other continuing engagements, the engagement letter
also should be updated periodically--probably on a yearly basis.
3. REQUIRED:
a. List and discuss the steps Francis should follow before accepting the
engagement.

Francis should explain to Nikolai the need to inquire of Jo and should

request permission to make such inquiries and allow Jo to discuss
confidential information.
Francis should advise Jo of Nikolais decision to change auditors as an
act of professional courtesy.
Francis should make reasonable inquiries of Jo regarding matters that
will aid in deciding whether to accept the engagement. (Francis
inquiries should include questions regarding facts which might bear on
the integrity of management, disagreements with management as to
accounting principles, auditing procedures or other significant matters,
and Jos understanding of the reason(s) for the change of auditors.)
Francis should weigh all the information received from Jo. If Jo does
not respond fully to Francis questions, Francis should consider the

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DECEMBER 14, 2015

implications of the limited response in deciding whether to accept the

engagement.
After weighing all information received from Jo, Francis should inform
Nikolai that a first-time audit is more time-consuming than a recurring
audit because the new auditor is generally unfamiliar with clients
operations and does not have the benefit of past knowledge of
company affairs to use a guide.
A discussion with Nikolai of the estimated required audit time and fee
arrangement should be coordinated with a clear explanation of the
purpose and scope of the audit. Any work that can be done by client
personnel should also be discussed so that excess audit time might be
eliminated and proposed report deadlines can be reasonably met.
To satisfy Francis quality control objectives, Francis should use
procedures such as reviewing the financial statements of Nikolai;
inquiring of third parties such as Nikolais banks, legal counsel,
investment bankers, and others in the business community as to
Nikolais reputation; and evaluating his ability to serve Nikolai properly
with reference to industry expertise, size of engagement, and available
staff.
If Francis has no reservations, after all significant factors have been
considered, discussed, and agreed to, Francis should accept the
engagement and confirm the understanding in an engagement letter.

b. What additional procedures should Francis perform on this first-time

engagement over and beyond those Francis would perform on the
Nikolai engagement of the following year?

Francis should review the work papers of Jo to obtain information that

will help plan the audit work.
Francis should make arrangements as early as possible for the initial
meeting with key company personnel who will be contacted
throughout the engagement.
Since basic information about the company is not readily available to
Francis on this first-time audit, information of a general nature should
be obtained as early in the planning stage as possible. (Such
information should include company history, nature of the business,
credit policies, financing methods, sales methods and terms, seasonal
business patterns, products, services, plant locations, internal
procedures, accounting policies, tax status, etc. Client procedures
manuals and manuals of accounts should be read to obtain such
information.)
Francis should immediately start obtaining the data needed to create a
permanent working paper file. (The file should include items such as

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DECEMBER 14, 2015

articles of incorporation, minutes, internal audit reports, deeds of trust,

pension agreements, loan agreements, leases, important contracts,
and other pertinent data.)
Francis must determine the scope of work necessary to verify the
opening balances. Such balances must be reviewed to determine
whether they are stated on a basis comparable with those of the period
under review. If Francis cannot verify the opening balances, Francis
should consider disclaiming an opinion on the earnings statement and
statement of changes in financial position.
The composition of all important accounts should be reviewed. Francis
should limit his examination of prior period accounts to a review or
survey of such accounts, without a detailed examination, unless the
results of Francis survey and analyses indicate the need for further
investigation of accounting methods in the prior years.
Francis must consider whether the financial statements are prepared
using generally accepted accounting principles that were consistently
applied. If, after performing necessary audit procedures, Francis
cannot be satisfied as to consistency, considerations must be given to
qualifying the auditors report as to consistency.
Francis should use professional judgment to determine the extent of
reliance that should be placed on the work of Jo. The scope of Francis
work may be reduced as a result of Francis consultation with Jo and a
review of the prior-year work papers of Jo.