ACCA F8 - Audit and Assurance Revision Kit 2016

(a)
Client acceptance procedures
(i)
(ii)
Prior to accepting the audit
Prior to accepting Cinnamon as an audit client, Salt & Pepper should carry out the following
procedures.
(1) Ensure the firm is professionally qualified to act: Salt & Pepper will need to consider whether
it could be disqualified to audit Cinnamon on legal or ethical grounds. This includes evaluating
any threats to auditor independence and ensuring that the engagement is compliant both with
the ACCA's Code of Ethics and Conduct and with local legislation.
(2) Ensure existing resources are adequate: Salt & Pepper will need to ensure that it has the
staff and technical expertise required to perform the audit competently within the timescale
agreed.
(3) Obtain references: Salt & Pepper will need to verify the identity, reputation and integrity of
Cinnamon's directors. If necessary, references should be obtained for the directors.
(4) Consider the associated risk: Based on the knowledge obtained about Cinnamon's business
and its directors, Salt & Pepper will need to determine the level of risk associated with the
audit engagement. It will need to assess whether the level of risk is acceptable to the firm, and
whether the proposed audit fee is appropriate in the light of the associated risk.
(5) Communicate with the predecessor auditors: Salt & Pepper should enquire about
Cinnamon's reason for not reappointing its previous auditor. It should obtain permission from
Cinnamon's directors to contact the outgoing auditor, and then communicate with the
outgoing auditor to confirm whether there have been any actions by the client which would on
ethical grounds preclude Salt & Pepper from accepting the engagement. The outgoing auditor
will also require the directors' permission to respond to Salt & Pepper's request.
If the directors refuse to allow Salt & Pepper to communicate with the outgoing auditor, or
withholds permission for the outgoing auditor to respond, Salt & Pepper should not accept
the audit engagement.
Preconditions for the audit
Auditors must only accept a new audit engagement if the preconditions for the audit are present.
To determine whether the preconditions for the audit are present, Salt & Pepper should do the
following.
Determine whether Cinnamon's financial reporting framework is acceptable. Factors to
consider include the nature of the entity, the purpose of the financial statements, the nature of
the financial statements, and whether law or regulation prescribes the applicable financial
reporting framework.
Obtain agreement from Cinnamon's management that it acknowledges and understands its
responsibilities for the following:
– Preparing the financial statements in accordance with the applicable financial reporting
framework
– Instituting a system of internal control sufficient to enable the preparation of financial
statements which are free from material misstatement
– Providing Salt & Pepper with access to all information of which management is aware
that is relevant to the preparation of the financial statements, with additional
information that the auditor may request, and with unrestricted access to entity staff
from whom the auditor determines it necessary to obtain audit evidence
If these preconditions are not present, the auditor shall discuss the matter with Cinnamon's
management. Salt & Pepper should not accept the audit engagement if:
It has determined that the financial reporting framework to be applied is not acceptable.
Management's agreement referred to above has not been obtained.
Answers 73