College of Accountancy

PRE-ENGAGEMENT ACTIVITIES
Contents:
1. Pre-Engagement Activities
2. Audits of Components
3. Recurring Audits

1. Pre-Engagement Activities
It is necessary for accounting firms to carefully determine whether to accept/continue an
engagement to avoid or minimize the likelihood of being associated with clients whose
management lacks integrity. Careful investigation of the client prior to accepting an engagement
also helps in avoiding or minimizing auditor’s business risk.
Pre-engagement activities performed before deciding whether an engagement will be
accepted/continued can be divided into two. Those controlled by the firm and those controlled by
the client.
a. Conditions controlled by the firm
In deciding whether to accept an initial audit engagement, the firm should consider:
1. Whether the engagement team is competent to perform the audit engagement and has
the necessary capabilities, including time and resources;
2. Whether the firm and the engagement team can comply with relevant ethical
requirements.
3. The integrity of the principal owners, key management and those charged with
governance of the entity;
Aside from the considerations for accepting an initial audit engagement, in deciding
whether to continue an audit engagement with an existing client, the auditor should consider:
4. Significant matters that have arisen during the current or previous audit engagement,
and their implications for continuing the relationship.

b. Conditions controlled by the client

The auditor accepts or continue an audit engagement only when the basis upon which it is
to be performed has been agreed, through:
1. Establishing whether the preconditions for an audit are present; and
2. Confirming that there is a common understanding between the auditor and
management and, where appropriate, those charged with governance of the terms of
the audit engagement.

1.1 Competence, Capabilities, and Resources

Consideration of whether the firm has the competence, capabilities, and resources
to undertake a new engagement from a new or an existing client involves reviewing the
specific requirements of the engagement and the existing partner and staff profiles at all
relevant levels, and including whether:
• Firm personnel have knowledge of relevant industries or subject matters;
• Firm personnel have experience with relevant regulatory or reporting
requirements, or the ability to gain the necessary skills and knowledge effectively;
• The firm has sufficient personnel with the necessary competence and capabilities;
• Experts are available, if needed;
• Individuals meeting the criteria and eligibility requirements to perform
engagement quality control review are available, where applicable; and
• The firm is able to complete the engagement within the reporting deadline.

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1.2 Integrity of Client

With regard to the integrity of a client, matters to consider include, for example:
• The identity and business reputation of the client’s principal owners, key
management, and those charged with its governance.
• The nature of the client’s operations, including its business practices.
• Information concerning the attitude of the client’s principal owners, key
management and those charged with its governance towards such matters as
aggressive interpretation of accounting standards and the internal control
environment.
• Whether the client is aggressively concerned with maintaining the firm’s fees
as low as possible.
• Indications of an inappropriate limitation in the scope of work.
• Indications that the client might be involved in money laundering or other
criminal activities.
• The reasons for the proposed appointment of the firm and non-reappointment
of the previous firm.
• The identity and business reputation of related parties.
The extent of knowledge a firm will have regarding the integrity of a client will
generally grow within the context of an ongoing relationship with that client.
Sources of information on such matters obtained by the firm may include the following:
• Communications with existing or previous providers of professional
accountancy services to the client, such as the predecessor auditor, in
accordance with relevant ethical requirements, and discussions with other
third parties.
• Inquiry of other firm personnel or third parties such as bankers, legal counsel
and industry peers.
• Background searches of relevant databases.
1.2.1 Communication with the Predecessor Auditor
When the prospective client has been audited previously, auditing
standards require that the successor auditor make certain inquiries of the
predecessor auditor before accepting the engagement. However, it should be
noted that the successor auditor should first request permission from the
prospective client before contracting the predecessor auditor. Communications
with the predecessor auditor should include questions as to the:
• Integrity of management
• Disagreements with management over accounting and auditing issues
• Communications with the audit committee or an equivalent group
regarding fraud, illegal acts, and internal-control-related matters.
• The predecessor’s understanding of the reason for the change in auditors
Inquiries of the predecessor auditor and responses thereto may help the
successor auditor in determining whether to accept the engagement. The
predecessor auditor should respond fully to the successor’s request unless an
unusual circumstance such as lawsuit exists or if the predecessor’s response is
limited, in which case the successor auditor should be informed.
If the prospective client refuses to permit the predecessor auditor to
respond, the successor auditor should have reservations about accepting the
engagement. Such a situation should raise serious problems about management’s
motivation and integrity.

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1.3 Pre-conditions of an Audit

Preconditions for an audit – The use by management of an acceptable financial
reporting framework in the preparation of the financial statements and the agreement of
management and, where appropriate, those charged with governance to the premise on
which an audit is conducted
In order to establish whether the preconditions for an audit are present, the auditor shall:
a. Determine whether the financial reporting framework to be applied in the
preparation of the financial statements is acceptable; and
b. Obtain the agreement of management that it acknowledges and understands its
responsibility:
i. For the preparation of the financial statements in accordance with the
applicable financial reporting framework, including where relevant their fair
presentation;
ii. For such internal control as management determines is necessary to enable the
preparation of financial statements that are free from material misstatement,
whether due to fraud or error; and
iii. To provide the auditor with:
a. Access to all information of which management is aware that is relevant to
the preparation of the financial statements such as records, documentation
and other matters;
b. Additional information that the auditor may request from management for
the purpose of the audit; and
c. Unrestricted access to persons within the entity from whom the auditor
determines it necessary to obtain audit evidence.
1.4 Agreement on Audit Engagement Terms
The auditor shall agree the terms of the audit engagement with management or
those charged with governance, as appropriate. The agreed terms of the audit engagement
shall be recorded in an audit engagement letter or other suitable form of written
agreement and shall include:
a. The objective and scope of the audit of the financial statements;
b. The responsibilities of the auditor;
c. The responsibilities of management;
d. Identification of the applicable financial reporting framework for the preparation
of the financial statements; and
e. 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.
In addition, an audit engagement letter may make reference to, for example:
• Elaboration of the scope of the audit, including reference to applicable legislation,
regulations, PSAs, and ethical and other pronouncements of professional bodies to
which the auditor adheres.
• The form of any other communication of results of the audit engagement.
• The fact that because of the inherent limitations of an audit, together with the
inherent limitations of internal control, there is an unavoidable risk that some
material misstatements may not be detected, even though the audit is properly
planned and performed in accordance with PSAs.
• Arrangements regarding the planning and performance of the audit, including the
composition of the audit team.
• The expectation that management will provide written representations
• The agreement of management to make available to the auditor draft financial
statements and any accompanying other information in time to allow the auditor
to complete the audit in accordance with the proposed timetable.

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• The agreement of management to inform the auditor of facts that may affect the
financial statements, of which management may become aware during the period
from the date of the auditor’s report to the date the financial statements are issued.
• The basis on which fees are computed and any billing arrangements.
• A request for management to acknowledge receipt of the audit engagement letter
and to agree to the terms of the engagement outlined therein.
When relevant, the following points could also be made in the audit engagement
letter:
• Arrangements concerning the involvement of other auditors and experts in some
aspects of the audit.
• Arrangements concerning the involvement of internal auditors and other staff of
the entity.
• Arrangements to be made with the predecessor auditor, if any, in the case of an
initial audit.
• Any restriction of the auditor’s liability when such possibility exists.
• A reference to any further agreements between the auditor and the entity.
• Any obligations to provide audit working papers to other parties.
It is in the interests of both the entity and the auditor that the auditor sends an
audit engagement letter before the commencement of the audit to help avoid
misunderstandings with respect to the audit.
4.2 Change in the Terms of Engagement
A request from the entity for the auditor to change the terms of the audit engagement may
result from:
• a change in circumstances affecting the need for the service,
• a misunderstanding as to the nature of an audit as originally requested, or
• a restriction on the scope of the audit engagement, whether imposed by management or
caused by other circumstances.
The auditor considers the justification given for the request, particularly the implications of a
restriction on the scope of the audit engagement. The auditor shall not agree to a change in the
terms of the audit engagement where there is no reasonable justification for doing so.
A change in circumstances that affects the entity’s requirements or a misunderstanding
concerning the nature of the service originally requested may be considered a reasonable basis
for requesting a change in the audit engagement. In contrast, a change may not be considered
reasonable if it appears that the change relates to information that is incorrect, incomplete or
otherwise unsatisfactory. An example might be where the auditor is unable to obtain sufficient
appropriate audit evidence regarding receivables and the entity asks for the audit engagement to
be changed to a review engagement to avoid a qualified opinion or a disclaimer of opinion.
Before agreeing to change an audit engagement to a review or a related service, an
auditor who was engaged to perform an audit in accordance with PSAs may need to assess, in
addition to the matters referred to above, any legal or contractual implications of the change.
If the auditor concludes that there is reasonable justification to change the audit
engagement to a review or a related service, the audit work performed to the date of change may
be relevant to the changed engagement; however, the work required to be performed and the
report to be issued would be those appropriate to the revised engagement. In order to avoid
confusing the reader, the report on the related service would not include reference to:
a. The original audit engagement; or
b. Any procedures that may have been performed in the original audit engagement, except
where the audit engagement is changed to an engagement to undertake agreed-upon
procedures and thus reference to the procedures performed is a normal part of the report.

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If the terms of the audit engagement are changed, the auditor and management shall agree
on and record the new terms of the engagement in an engagement letter or other suitable form of
written agreement.
If the auditor is unable to agree to a change of the terms of the audit engagement and is
not permitted by management to continue the original audit engagement, the auditor shall:
a. Withdraw from the audit engagement where possible under applicable law or regulation;
and
b. Determine whether there is any obligation, either contractual or otherwise, to report the
circumstances to other parties, such as those charged with governance, owners or
regulators.
4.3 Audits of Components
When the auditor of a parent entity is also the auditor of a component (subsidiary, branch
or division), the factors that may influence the decision whether to send a separate audit
engagement letter to the component include the following:
• Who appoints the component auditor;
• Whether a separate auditor’s report is to be issued on the component;
• Legal requirements in relation to audit appointments;
• Degree of ownership by parent; and
• Degree of independence of the component management from the parent entity.
4.4 Recurring Audits
On recurring audits, the auditor shall assess whether circumstances require the terms of
the audit engagement to be revised and whether there is a need to remind the entity of the
existing terms of the audit engagement.
The auditor may decide not to send a new audit engagement letter or other written
agreement each period. However, the following factors may make it appropriate to revise the
terms of the audit engagement or to remind the entity of existing terms:
• Any indication that the entity misunderstands the objective and scope of the audit.
• Any revised or special terms of the audit engagement.
• A recent change of senior management.
• A significant change in ownership.
• A significant change in nature or size of the entity’s business.
• A change in legal or regulatory requirements.
• A change in the financial reporting framework adopted in the preparation of the financial
statements.
• A change in other reporting requirements.

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