Auditing Assurance - Assign2

AUDITING ASSURANCE - ASSIGNMENT
What sources of information can auditors use in connection with deciding whether to
accept a new client?
The source of information that a prospective auditors use in connection in deciding whether to
accept a new client is the basic information directly from the predecessor auditor regarding the
issues that reflect directly on the integrity of management, provided that it should be approved
by the client. Additionally, deciding whether to accept a client also includes:
Financial information about the prospective client.
Annual reports, interim statements, registration statements, and reports to regulatory agencies.
Criminal background checks of all senior managers.
Why do predecessor auditors need to obtain the client’s consent to give information to
prospective auditors? What information should prospective auditors try to obtain from
predecessor auditors?
The reason why predecessor auditors need to obtain the client’s consent to give information to
prospective auditors is because is because it is required by the Code of Professional Conduct
set by AICPA.
The information that prospective auditors will try to obtain from predecessor auditors are the
managements’ integrity, any disagreements with management's about accounting principle
and/or audit procedures, the reason for the change of auditors, and communication the
predecessor gave the former client about fraud, illegal acts, and internal control
recommendations.
What benefits are obtained by having an engagement letter? What is a termination letter?
The benefits of having an engagement letter is that it acts as a contract between the client’s and
the auditor. It establishes an understanding between the client and the auditing firm of the terms
of the engagement and nature of the work and avoids legal liability assertions based on failure
to do work that the CPA may not have contemplated or agreed to.
A termination letter, on the other hand is a letter from a former auditing firm to a former client
specifying terms for future services and the auditors' understanding of the circumstances related
to the termination.
Using the Work of Internal Auditors. North, CPA, is planning an independent audit of the
financial statements of General Company. In determining the nature, timing, and extent
of the audit procedures, North is considering General’s internal audit function, which is
staffed by Tyler.
Required:
a. In what ways can the internal auditor’s work be relevant to North, the independent
auditor?
North CPA, the independent auditor should assess and consider the internal auditor’s
objectivity and competence.
Objectivity
It is given that internal auditors are employed and paid by the client company, therefore
they are not considered independent like external auditors, however they should still
possess objectivity in their work as an auditor. To measure or at least to know whether
the internal auditor’s work can be relevant to the independent auditor is to check and
assess the organizational status and lines of communication of the internal auditor to the
client company. The internal auditor should report directly to the audit committee of the
board of directors where the objectivity of the internal auditor is enhanced, however
objectivity is questioned when the internal auditors report the managers where the
outcome of the audit is at stake.
Competence
In terms of competence, to measure or at least to know whether the internal auditor’s
work can be relevant to the independent auditor is to investigate the educational and
experience qualifications of the internal auditor since these affects the quality of the audit
reports and documentation within the client company.
b. What factors should North consider, and what inquiries should North make in
deciding whether to use Tyler’s internal audit work?
Favorable conclusion about objectivity and competence of internal auditor on their

internal audit works enables North, the internal auditor to rely on them thus North can
use the internal audit’s work. Additionally, by relying in part on the work of the internal
audit department, external auditors may be able to reduce the nature, timing, or extent of
their own procedures however, independent auditors can never delegate a responsibility
for audit decisions and never rely when a high professional judgement is needed.
Internal auditors can only help the external auditors to the extent that internal auditors’
work can be utilized more extensively without reperforming a percentage of the work
when the account balance involves low professional judgment. The relationship between
internal and external auditors are realized and cost-benefit will be achieved when the
two groups work together provided that internal auditors are proved to be objective and
competent on their audit work.
Client Selection.
You are a CPA in a regional public accounting firm that has 10 offices in three states. Mr.
Shine has approached you with a request for an audit. He is president of Hitech Software
and Games Inc., a five-year-old company that has recently grown to $500 million in sales
and $200 million in total assets. Shine is thinking about going public with a $25 million
issue of common stock, of which $10 million would be a secondary issue of shares he
holds. You are very happy about this opportunity because you know Shine is the new
president of the Symphony Society board and has made quite a civic impression since
he came to your medium-size city seven years ago. Hitech is one of the growing
employers in the city.
Required:
a. Discuss the sources of information and the types of inquiries that you and the
firm’s partners may make in connection with accepting Hitech as a new client.
The sources of information that can be used in accepting Hitech as a new client are:
1. Annual report to shareholders;
2. Interim financial statements;
3. Securities registration statements;
4. Annual report on SEC Form;
5. Reports to regulatory agencies.
The inquiries can be made from the parties related to the client are:
1. Banker;
2. Legal Counsel.
b. Do professional audit standards require any investigation of prospective clients?

Yes. AICPA Quality Control Standards require firms to investigate all prospective
audit clients.
c. Suppose Shine also told you that 10 years ago his closely held hamburger franchise
business went bankrupt, and on investigation, you learn from its former auditors (your
own firm in another city) that Shine was fraudulent in its application of franchise-fee
income recognition rules and presented such difficulties that your firm resigned from the
audit (before the bankruptcy). Do you think the partner in charge of the audit practice
should accept Hitech as a new client?
Yes, yet the conclusion toward acceptance or non-acceptance is the sole discretion of the
auditing firm. The incident happened 10 years ago and his business of that time went bankrupt
already and has a non-bearing on the company Mr. Shine is handling now. He is now in a new
line of business and seems to be doing good. Yet, we need to conduct control risk assessment
and substantive testing to know if there are material misstatements happening in his business.

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What sources of information can auditors use in deciding whether to accept a new client?

Why do predecessor auditors need to obtain the client’s consent to give information to prospective auditors? What information should prospective auditors try to obtain from predecessor auditors?

AUDITING ASSURANCE - ASSIGNMENT

Favorable conclusion about objectivity and competence of internal auditor on their

b. Do professional audit standards require any investigation of prospective clients?

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