CHAPTER 4

PRELIMINARY
ENGAGEMENT
ACTIVITIES
(PREPLANNING
ACTIVITIES) 1-1
Preliminary
Engagement Activities
1) Perform procedures regarding
acceptance or continuance of the
client relationship.
2) Evaluate compliance with ethical
requirements, including
independence.
3) Establish an understanding of the
terms of the engagement.
1-2
 Preliminary Engagement
Activities
Perform procedures regarding acceptance
or continuance of the client relationship.
Acceptance or selection procedures

Evaluate integrity of the clients management

Investigate/ research clients background.

Inquiring from other firm personnel or third
parties.

Communicate with prospective clients
predecessor auditor.

1-3
 Preliminary Engagement
Activities
Perform procedures regarding
acceptance or continuance of the client
relationship.
Acceptance or selection procedures

Other considerations

1-4
 Preliminary Engagement
Activities
Evaluate compliance with ethical
requirements, including independence.
Independence
Professional Competence

Ability to serve the client properly

1-5
 Preliminary Engagement
Activities
Establish an understanding of the terms
of the engagement
The preconditions for an audit are present:

Management has used acceptable financial reporting

framework (or suitable criteria or appropriate basis for) in
the preparation of the financial statements.
Management agrees to the premise that it has
acknowledged and understood its responsibilities

1-6
 Preliminary Engagement
Activities
Establish an understanding of the terms
of the engagement
NOTE:
If the preconditions for an audit are not present,

the auditor shall not accept the proposed audit

engagement, unless acceptance is required by
law or regulation.
Preconditions for an audit are within the control

of the entity.

1-7
 Preliminary Engagement
Activities

Agreement on audit engagement terms:

The auditor shall agree on the terms of the audit

engagement with management or those charged
with governance, as appropriate. Such agreed
terms shall be recorded in an audit engagement
letter or other suitable form of written
engagement.

1-8
 Preliminary Engagement
Activities
Preliminary conference:
The firm is independent
The firm is competent to perform the audit
The firm can serve the client properly, and
The clients reputation is one of integrity

1-9
 Preliminary Engagement
Activities
Engagement letter documents and
confirms the:
Auditors acceptance of the appointment
Clients acceptance of the terms of the audit engagement

Responsibilities of both the client management and the

auditor
Arrangements or agreed terms of the engagement (such as

the objectives and scope of the audit, the form of any

reports, etc.)
IMPORTANCE: This will help in avoiding or
minimizing or resolving future.
1-10
 Preliminary Engagement
Activities
Engagement letter documents and
confirms the:
Auditors acceptance of the appointment
Clients acceptance of the terms of the audit engagement

Responsibilities of both the client management and the

auditor
Arrangements or agreed terms of the engagement (such as

the objectives and scope of the audit, the form of any

reports, etc.)
IMPORTANCE: This will help in avoiding or
minimizing or resolving future.
1-11
 Preliminary Engagement
Activities

Form and Contents of the

Engagement Letter:

1-12
 Preliminary Engagement
Activities
Form and Contents of the
Engagement Letter:

1-13
 Preliminary Engagement
Activities
Form and Contents of the
Engagement Letter:

1-14
 Preliminary Engagement
Activities
Audits of Components:
Factors to consider whether to send a separate
engagement letter to the component when the
auditor of the parent company is also the auditor
of its component (subsidiary, branch or division):
Who appoints the auditor of the component
Whether a separate auditors report is to be issued
on the component
Legal requirements in relation to audit
appointments
1-15
 Preliminary Engagement
Activities
Audits of Components:
The extent of any work performed by other
auditors
Degree of ownership by parent, and
Degree of independence of the
components management from the parent
entity

1-16
 Preliminary Engagement
Activities
Audit Engagement in Recurring Audits:
The auditor may decide not to send a new engagement letter
or other written agreement each period.
The following factors may make it appropriate to
send a new engagement letter:
Revision of the terms of audit engagement because:

Any revised or special terms of the engagement

A recent change of senior management or those charged with
governance

A significant change in ownership

A significant change in nature or size of the clients business

A change in legal or regulatory requirements

1-17
 Preliminary Engagement
Activities
Audit Engagement in Recurring Audits:
The following factors may make it appropriate to
send a new engagement letter:
Revision of the terms of audit engagement because:

A change in the financial reporting framework adopted in the
preparation the financial statements

A change in other reporting requirements

Reminder to the client of the existing terms of the
engagement

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

1-18
 Preliminary Engagement
Activities
Audit Engagement in Recurring
Audits:
The following factors may make it appropriate to
send a new engagement letter:
Reminder to the client of the existing terms of

the engagement
Any indication that the client misunderstands

the objective and scope of the audit.

1-19
 Preliminary Engagement
Activities
Audit procedures when the client
requests for a change in engagement:
Consider the appropriateness of reasons for
the engagement
If there is a reasonable justification for the
change- stop and agree.
If there is no reasonable justification- refuse
and continue (withdrawal).

1-20
 Preliminary Engagement
Activities
Whether or not to accept a change in
engagement:
Change in terms of the audit engagement.
Change to a lower level assurance
engagement.

1-21
 Preliminary Engagement
Activities
Change in terms of the audit engagement.
Reasonable basis includes:
A change in circumstances affecting the entitys
requirements
A misunderstanding as to the nature of the

service originally requested

Not a reasonable basis:
Change that relates to information that is
incorrect, incomplete or otherwise unsatisfactory.

1-22
 Preliminary Engagement
Activities
Change to a lower level assurance
engagement:
The auditor should agree if there is
reasonable basis, such as:
A change in circumstances affecting the entitys
requirements or need for the service
A misunderstanding as to the nature of an audit or

related service originally requested

A restriction on the scope of the engagement, whether

imposed by management or caused by circumstances

1-23
 Preliminary Engagement
Activities
Change to a lower level assurance
engagement:
Not agree if there is no reasonable
justification
if the change relates to incorrect, incomplete or
otherwise unsatisfactory information.

Withdraw from the engagement

1-24
END
1-25