QUIZ 1 AT

Preliminary arrangements agreed to by the auditor and the audit client should be reduced to writing by the auditor. The best place to set forth these arrangements is in

• A memorandum to be placed in the permanent section of the auditing working papers.

• An audit engagement letter.

• A client representation letter.

• A confirmation letter attached to the constructive services letter.

Statement 1: If management or those charged with governance impose a limitation on the scope of the auditor’s work in the terms of a proposed audit engagement such that the auditor believes the limitation will result in the auditor disclaiming an opinion on the financial statements, the auditor shall not accept such a limited engagement as an audit engagement, unless required by law or regulation to do so.

Statement 2: The auditor shall agree the terms of the audit engagement with management or those charged with governance, as appropriate.

• Both statements are true.

• Both statements are false.

• Only statement 1 is true.

• Only statement 2 is true.

Engagement letters are widely used in practice for professional engagements for all types. The primary purpose of the engagement letter is to

• Remind management that the primary responsibility for the financial statement rests with the management.

• Provide a written record of the agreement with the client as to the services to be provided.

• Satisfy requirements of the CPA’s liability for insurance policy.

• Provide a starting point for the auditor’s preparation of the preliminary audit program.

It is in the interest of both client and auditor that the auditor sends an audit engagement letter, preferably before

• The performance of the substantive testing.

• The commencement of the engagement.

• The completion of the audit.

• Before the issuance of audit report.

Assuming a recurring audit, in which of the following situations would the auditor be unlikely to send a new engagement letter to the client?

• A recent change in partner and/or staff involved in the audit engagement.

• A change in terms of client management.

• A recent change of client management.

• A significant change in the nature or size of the client’s business

On recurring audits, the auditor may decide not to send a new engagement letter each year. However, he might decide to send a new letter when:

• There is a change in the auditors who will assist in the conduct of the audit.

• There is a legal requirement.

• There is a change in the client’s accounting policy for inventories.

• There is a change in the estimated life of the client’s property and equipment.

On recurring audits, the auditor may decide not to send a new engagement letter each year. However, he might decide to send a new letter when:

• Any indication that the entry misunderstands the objective and scope of the audit.

• A change in the financial reporting framework adopted in the preparation of the financial statements or other reporting requirements.

• A significant change in ownership.

• All of the choices.

An audit engagement letter least likely includes

• A reference to the inherent limitation of an audit that some material misstatements may remain undiscovered.

• Identification of specific audit procedures that the auditor needs to undertake.

• Description of any letters or reports that the auditor expects to submit to the client.

• Arrangements concerning the involvement of internal auditors and other client’s staff.

Which of the following actions may be appropriate if the auditor is unable to agree to a change of the engagement and is not permitted to continue the original engagement?

I. Auditor should withdraw from the engagement.

II. Consider whether there is any obligation to report to the board of directors or shareholders the circumstances necessitating withdrawal.

• I

• I, II

• II

• Neither I nor II

The form and content of audit engagement letters may vary for each client, but they would generally include reference to the following, except

• The objective of the audit of financial statements.

• Auditor’s responsibility for the financial statements.

• The form of any reports or other communication of results of the engagement.

• Unrestricted access to whatever records documentation and other information requested in connection with the audit.