Audit and Assurnace 5th Edition Solutions

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CHAPTER 4
Engagement Planning
LEARNING OBJECTIVES

| ReviewCheckpoints| Exercises, Problems and Simulations| 1. List and describe the activities auditors undertake before beginning an engagement.| 1, 2, 3, 4| 53, 54, 55, 62, 66| 2. Identify the procedures and sources of information auditors can use to obtain knowledge of a client’s business and industry.| 5, 6, 7, 8, 9| 52, 56, 59, 65 | 3. Perform analytical procedures to identify potential problems.| 10, 11, 12, 13, 14, 15| 47, 48, 49, 51, 58, 63, 64| 4. List and discuss matters of planning auditors should consider for clients who use computers and describe how a computer can be used as an audit tool.| 16, 17, 18, 19, 20, 21, 22| 57, 60| 5. Review audit documentation for proper form and content.| 23, 24, 25| 50, 61|

SOLUTIONS FOR REVIEW CHECKPOINTS

4.1A CPA can use the following sources of information to help decide whether to accept a new audit client.

Financial information prepared by the prospective client: * Annual reports to shareholders
* Interim financial statements
* Securities registration statements
* Annual report on SEC Form 10K
* Reports to regulatory agencies

Inquiries directed to the prospect's business associates: * Banker
* Legal counsel
* Underwriter
* Other persons, e.g., customers, suppliers

Predecessor auditor, if any, communication, re: integrity of management, disagreements with management

Analysis:
* Special or unusual risk related to the prospect * Need for special skills (e.g., computer or industry expertise)

Internal search for relationships that would compromise independence

CPAs can search business press articles and stories and legal files on the Lexis-Nexis system or on the Internet for news about chairman of the board, the CEO, the CFO, and oftentimes other high-ranking officers. CPAs can engage an outside search firm (private investigators) to conduct additional searches for information. CPAs are looking for information about client risk factors--companies accused of fraud, companies under SEC or other regulatory investigation, companies that have changed auditors frequently, and companies showing recent losses.

4.2Client consent is required because the Code of Professional Conduct prohibits the predecessor auditor from revealing confidential information to the successor without the consent. Confidentiality remains even when the auditorclient relationship ends.

A successor auditor should inquire specifically about:
* Management's integrity
* Disagreements the predecessor may have had with management about accounting principles and audit procedures. * Communications the predecessor gave the former client about fraud, illegal acts, and internal control recommendations. * The predecessor auditor's understanding about the reasons for the change of auditors (particularly about the predecessor's termination).

4.3Engagement letter benefits:
* Helps establish an understanding between client and auditor of the terms of the engagement and the nature of the work. * Helps avoid quarrels and misunderstandings between client and auditor. * Helps avoid disputes over the audit fee.

* Helps avoid legal liability assertions based on failure to do work that the CPA may not have contemplated or agreed to do.

A termination letter is a letter from a former auditor (fired or resigned) to a former client specifying terms for future services and the auditor's understanding of the circumstances of termination.

4.4Persons and skills normally assigned to a "full service" audit team:

Audit personnel:
*...
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