Chapter 4 - Overview of the Audit Process and Preliminary Activities CHAPTER 4 OVERVIEW OF AUDIT PROCESS AND PRELIMINARY ACTIVITIES ep repens geen Chapter Overview and Objectives: Re EPR ee SE This Chapter discusses the audit process in detail and presents the activities during its preliminary phase. At the end of this chapter, readers should be able to discuss: L open The activities conducted in performing financial statements audit The different categories and types of assertions made by the entity The major preliminary engagement activities The activities involved in client acceptance The process of agreeing the terms of the audit engagement The considerations taken in accepting a change in an engagement sss Relevant references: PSA 200 - Overall Objectives of the Independent Auditor and the Conduct of an Audit in accordance with International Standards on Auditing PSA 210 - Agreeing the Terms of Audit Engagement PSA 500 - Audit Evidence 121 Aim. Believe.. Claimiminary Activities Chapter 4 — overview of the Audit Process and Preliminary INTRODUCTION ind Audit of financial statements is normally Se feeds ahe me | qualified auditor:on an annual basis to meet the I’ UN fina financial statement users. The entity is en reporting tramewoner statements by complying with applicable financial reper 7S Tewari | PERS, PERS for SME, PFRS for Small Entities). To uel’ Tt DAY fang | statements, auditors must adhere to applicable auditing s ePoay | process of objectively obtaining ang | .s about economic actions and Events ty tween these assertions ay Its thereof. As defined, an audit\is a systematic evaluating evidence regarding assertion: ascertain the degree of correspondence b established criteria and communicating the resu Basically, the logic and objective of audit of financial statements are similar in ay audits of financial statements. In order to attain the objective of the audit, the auditor needs to undergo a systematic process comprising certain activities, Being a systematic process, an audit engagement is performed by means of ay ordered or structured series of steps. This process is commonly called as “AupT | PROCESS”. AUDIT PROCESS: A GENERAL APPROACH A general overview of the audit process may be best represented by the following_| diagram: Entity ‘The auditor a eH Prepares and performs apeatcios Deas Tene ae gathers audit ‘expresses an. financial procedures ene audit opinion statements Entity prepares and presents financial statements An audit in accordance with PSAs is conducted on the premise that management and, where appropriate, those charged with governance hate responsibilities that are fundamental to the conduct of the audit. The financial statements subject to audit are those of the entity, prepared até presented by management of the entity with Oversight from those charg with governance. The audit of the financial statements does not reli management or those charged with governance of those responsibilities Page 22Chapter 4 — Overview of the Audit Process and Preliminary Activities salen The financial statements are considered as assertions or ialedaar wei made by the entity, through its management and those charge Hck governance, as appropriate, These assertions may be explicitly or implicitly included in the financial statements and may fall into the following categories (TAP): Category Assertions Classes of | ¥ Occurrence - transactions and events that Transactions and have been recorded have occurred and pertain events for the to the entity. period under audit | VY Completeness - all transactions and events (Toccac) that should have been recorded have been recorded, i Y Cutoff - transactions and events have been recorded in the correct accounting period. v Accuracy - amounts and other data relating to recorded transactions and events have been recorded appropriately. v Classification - transactions and events have been recorded in the proper accounts. Completeness - all assets, liabilities and equity interests that should have been recorded have been recorded. Account balances | ~ at the period end (ACERV) Y Existence - assets, liabilities, and equity interests exist. ¥ — Rights and obligations - the entity holds or controls the rights to assets, and liabilities are the obligations of the entity. v Valuation and allocation - assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded. Presentation and| “ Occurrence and rights and obligations ~~ disclosure disclosed events, transactions, and other (Pocac) matters have occurred and pertain to the entity. ¥ Completeness - all disclosures that should have been included in the financial statements have been included. ¥ Accuracy and valuation - financial and other information are disclosed fairly and at appropriate amounts. Aim... Believe... Claim... Page 123Chapter 4 ~ Overview of the Audit Process and Pre! el Br ~ | ¥ Classification an abil -Fngas) information is appropriately presenteg i described, and disclosures are git | expressed. | oe ~_ expressed —~ | Additional responsibilities Moreover, pan provides that management and, where PPropriat those charged with governance have responsibility: , a. For the preparation and presentation of the financial statements , accordance with the applicable financial reporting framework, this includes the design, implementation and maintenance Of “internal control relevant to the preparation and presentation of finangjy statements that are free from material misstatement, whether due to fraud or error; and b. To provide the auditor with: i. All information, such as records and documentation, and othe matters that are relevant to the preparation and presentation ofthe financial statements; ii. Any additional information that the auditor may request from management and, where appropriate, those charged with governance; and ili. Unrestricted access to those within the entity from whom the auditor determines it necessary to obtain audit evidence. As part of their responsibility for the preparation and presentation of the financial statements, management and, where appropriate, those charged with governance are responsible for: * The identification of the applicable financial reporting framework, the context of any relevant laws or regulations. © The preparation and presentation of the financial statements it accordance with that framework. * An adequate description of that framework in the financdl statements. The preparation of the financial statements requires management © exercise judgment in making accounting estimates that are reasonable intté circumstances, as well as to select and apply appropriate accounting policies These judgments are made in the context of the applicable finan! reporting framework. 1, The auditor performs audit procedures 'n conducting an audit of financial statements, the overall objectives oft auditor are: 4 page ;Chapter 4 — Overview of the Audit Process and Preliminary Activities ‘a, To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework; and b. To report on the financial statements, and communicate as required by the PSAs, in accordance with the auditor's findings. To achieve the overall objectives of the audit, the auditor shall design and perform audit procedures which enable the gathering of audit evidence. Such evidence will be used as a basis in expressing the opinion required by the audit of financial statements. When selecting procedures, the auditor considers various factors including assertions made by the entity, assessed level of risks, and materiality. Procedures to be performed may be categorized into (1) major audit procedures and (2) specific audit procedures. Major audit procedures 1. Risk assessment procedures. The audit procedures performed to obtain an understanding of the entity and its environment, including the entity's internal control, to identify and assess the risks of material misstatement, whether due to fraud or error, at the financial statement and assertion levels. 2. Test of controls. An audit procedure designed to evaluate the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level. 3. Substantive procedure. An audit procedure designed to detect material misstatements at the assertion level. Substantive procedures comprise: i. Tests of details (of classes of transactions, account balances, and disclosures), and ji, Substantive analytical procedures. Specific audit procedures 1. Inspection of Records or Documents. It consists of examining records or documents, whether internal or external, in paper form, electronic form, or other media. 2. Inspection of Tangible Assets. It consists of physical examination of the assets. 3. Observation. It consists of looking at a process or procedure being performed by others. 4. Inquiry. It consists of seeking information of knowledgeable persons, both financial and non-financial, throughout the entity or outside the ae Aim... Believe... Claim. Page 125Chapter 4 — Overview of the Audit Process and Preliminary Activities | entity, This procedure may be used extensively throughout the aude a complement of other audit procedures. 5. Confirmation. A specific type of inquiry that is the Process OF obtain @ representation of information or of an existing condition directly fog a third party, : 6. Recalculation, It consists of checking the mathematical accu a documents or records. This procedure may be performed Manually electronically. 7. Reperformance. It involves the auditor’s independent execution a Procedures or controls that were originally performed as part of i, entity's internal control. 8. Analytical Procedures, Procedures consist of evaluations of financg information made by a study of plausible relationships among bos financial and non-financial data. Analytical procedures also encompis, the investigation of identified fluctuations and relationships that ae inconsistent with other relevant information or deviate Significant from predicted amounts. 2. The auditor gathers audit evidence Through the procedures performed, the auditor obtains sufficer appropriate audit evidence to be able to draw reasonable conclusions on which to base the audit opinion. Audit evidence refers to information used by the auditor in arriving at te conclusions on which the auditor's opinion is based. Audit evidence includes both information contained in the accounting records underlying te financial statements and other information. 3. The auditor expresses an audit opinion The auditor provides a written audit report containing a conclusion or opinion regarding the fairness of preparation and presentation of statements in accordance with the applicable financial reporting framewot Opinion to be expressed by the auditor May include either of the followine a, Unmodified opinion. The opinion expressed by the auditor when t® auditor concludes that the financial statements are prepared, in material respects, in accordance with the applicable financial report’ framework. This type of apinion is also known as unqualified opinion: b. Modified opinion. A qualified opinion, an adverse opinion disclaimer of opinion. The auditor shall modify the opinion in auditor's report when: 1. A choice between Qualified and Adverse. The auditor concit that, based on the audit evidence obtained, the financial as a whole are not free from material misstatement; or lieve... CleChapter 4 — Overview of the Audit Process and Preliminary Activities 2. Achoice between Qualified and Disclaimer of opinion. The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement. Sub-phases of audit process The above audit process may be divided into two sub-phases, the investigative phase and the reporting phase. Investigative phase includes performance of audit procedures and gathering of audit evidence. On the other hand, reporting phase includes the expression of opinion, preparation of the report, and communication of the results to the different users of the audited financial statements. AUDIT PROCESS: A MORE DETAILED APPROACH The specific sequence or order of activities in performing financial statements audit may vary from firms to firms depending on their own policies and procedures. However, such sequence of different activities normally will include the following steps: Preliminary Planning an audit of ‘engagement financial statements activities oe 7 aiond ee internal control Issuanceofthe ) audit report AUDIT PROCESS: A MORE DETAILED APPROACH PHASE DESCRIPTION 1. Preliminary This phase will require a decision from the auditor ‘engagement whether or not to accept a new client or continue activities relationship with an existing one. This process would Ll require evaluation not only of the auditor's qualification, Aim... Believe... Claim... Page 127Pre Chapter 4 ~ Overview ofthe Aust Process and P™ of financial statements Planning an audit | Audit pl eliminary Activities but also the integrity and auditabilty Of the ig financial statements. imize the likelihood of objective: To minimiz! te Primary el "client whose management lacks into ny ining involves the development of an oye plan and audit program, .d more detailed knowledge apo, i ral’ audit strategy, audit auditor usually obtained n the client's business and industry in order to understang the transactions and events affecting the financigy statements. Preliminary assessment of risk and materiality is aj,, made during this phase. Primary objective: To assess the different rig, associated with the audit to determine the nature, | timing and extent of further audit procedures necessary to be performed 3. Study and evaluation of internal control Since entity's internal control directly affects the reliability of the financial statements, it is appropriateto study and evaluate these controls. Primary objective: To establish a basis for reliance on internal controls, in determining the nature, timing and extent of audit procedures to be performed 4. Evidence- gathering (Substantive testing) Using the information obtained in audit planning and consideration of internal controls, the auditor performs substantive test to determine whether entity's financial statements are presented fairly in accordance with financial reporting standards. Substantive procedures could either be analytical procedures or test of details of transactions and balances | This phase will always be performed by the auditor. Primary objective: To ascertain the degree of correspondence between the financial statements Prepared by client’s management and the financial | reporting framework. With this, the auditor will be ale to conclude whether or not the financial statements 2 | Presented fairly in accordance with financial reporti"é | standards | 5. Completing the audit nh eS are performed; conclusio” ‘ed; and an overall opinion is fo! Wrapping-up procedur reached are review, during this phase. i28Chapter 4 — Overview of the Audit Process and Preliminary Activities Primary objective: To assist the auditor in assessing conclusion reached is consistent with evidence gathered 6. Issuance of the | In this stage, auditor prepares and issues audit report audit report which describes the scope of the audit and states the auditor’s conclusion regarding the fairness of the financial statements. Primary objective: To communicate the conclusions reached by the auditor to various intended users 7. Post-audit ‘After completion of the audit engagement, auditor responsibilities | performs procedures that will enable him/her identify areas for improvement in the current and future engagements. Primary objective: To assess and evaluate the quality of services delivered by the engagement team PRELIMINARY ENGAGEMENT ACTIVITIES MAJOR AUDIT PROCEDURES In making a decision whether to accept or reject an engagement, the auditor's firm should consider the following: 1. Its competence; 2. Its independence; 3. Its ability to serve the client properly; and 4. The integrity of the prospective client’s management. To adequately address the above items, the auditor is expected to perform the following: 1. Obtain a preliminary knowledge of the client’s business and industry to determine whether the auditor has the degree of competence. required by the engagement. As prescribed by Code of Ethics for Professional Accountants, a professional accountant in public practice should agree to provide only those services that the professional accountant in public practice is competent to perform. This means that auditor can only accept engagements whose requirements are within auditor's capacity and capability. Ordinarily, to determine whether ‘the auditor has the degree of competence required by the engagement, auditor obtains a preliminary knowledge of the client’s business and industry. Aim... Believe... Claim... Page 129iminary Activities Chapter 4 — Overview of the Audit Process and Preliminary ‘s 2. hreats to the firm’s independence nd objectivity, and if so, whether adequate 1 er ocomnsiien Before accepting a specific audit engagement, the 20" objectivity “whet there are any threats to the firm’s independence a Y and if whether adequate safeguards can be established. Independence consists of both independence of mind and independence in appearance. independence of mind is the state of mind that Permits the expression of a conclusion without being affected by influences th3, compromise professional judgment, allowing an individual to act wit, integrity, and exercise objectivity and professional skepticism. On the othe, hand, independence in appearance is the avoidance of facts ang circumstances that are so significant that a reasonable and informed thirg party, having knowledge of all relevant information, including safeguards applied, would reasonably conclude a firm’s, or a member of the assurance team’s, integrity, objectivity or professional skepticism had been compromised. Consider whether there are any t her $0, In an audit engagement, the Code of Ethics for Professional Accountants requires all members of the audit team to be independent from the client. Audit team includes members of the engagement team, the firm, and its network firm/s. Evaluate the firm’s ability to serve the prospective client. Prior to acceptance of an engagement, the firm considers its resources (e.g. personnel) in evaluating whether the firm has the ability to serve the Prospective client properly. Evaluate auditability. In an audit engagement, auditor gathers sufficient appropriate evidence to form and express an opinion as to the fairness of preparation and presentation of the client's financial statements. For the auditor to do this, accounting records, documents and other information that supports the client's financial statements should be made available to the auditor. Absence of records, documents and other information raises significant doubt about client’s auditability. Investigate the integrity of the prospective client’s management The proposed auditor (previously called Successor auditor) considers whether acceptance of a new or continuing an existing client relationshiP would create any threats to compliance with the fundamental principles: Potential threats to integrity or professional behavior may be created from, for example, questionable issues associated with the client {its owners page 13Chapter 4 - Overview of the Audit Process and Preliminary Activities The main objective of this procedure Is to minimize the likelihood of being associated to a client whose management lacks integrity. Investigation of the integrity of the client’s management may be performed through reading published articles, inquiry to appropriate parties, or communication with the previous auditor (previously called predecessor auditor) subject to client’s permission. Note: Every time communication is made to parties other than the client, the auditor shall seek permission from the client and document the items discussed. Matters to be discussed with previous auditor include the following: (RID) a. The previous auditor's understanding as to the Reasons for change in auditors; b. Information that might bear on the Integrity of the management; and c. Disagreements between the previous auditor and management as to accounting principles, auditing procedures, etc. 6. Agree on the terms of the engagement and prepare an engagement letter. After considering the above factors, the auditor shall decide whether to accept or decline the proposed audit engagement. If the auditor decided to accept the engagement, the auditor and the client shall agree on the terms of the engagement. ACCEPTANCE OF AN ENGAGEMENT Objective The objective of the auditor is to accept or continue an audit engagement only when the basis upon which it is to be performed has been agreed, through: a. Establishing whether the preconditions for an audit are present; and b. 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. A. 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 Aim... Believe... Claim... Page 131iminary Activities \ Chapter 4— overview of the Audit Process and Preliminory acknowledge, b. Obtain the agreement of mana ang understands its responsibilty: tements in accordance : ration of the finan z z i. For the prepa 1 reporting framework, including Where gement that the applicable financial relevant their fair presentation; neers ii, For such internal control as manageme ai q i ements that are fre, enable the preparation of financial i at e from material misstatement, whether due to fraut 5 iii, To provide the auditor with: a. Access to all information of which management is aware that, relevant to the preparation of the financial statements such a. 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, Limitation on Scope Prior to Audit Engagement Acceptance 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. Other Factors Affecting Audit Engagement Acceptance If the preconditions for an audit are not present, the auditor shall discuss the matter with management. Unless required by law or regulation to do so, the auditor shall not accept the proposed audit engagement: a. If the auditor has determined that the financial reporting framework to be applied in the preparation of the financial statements i unacceptable; or b. If the agreement of management that it acknowledges and understands its responsibility has not been obtained, B. AGREEING THE TERMS OF AUDIT ENGAGEMENTS The auditor shall agree on the terms of e i lie Ngagement with the client represented by management or those charged with governance, 3 appropriate. The agreed terms shall be records, mt letter or other suitable form of written eee an audit engageme! {tis in the interest of both the entity and the auditor that the auditor sends an engagement letter, preferably before the commenc f the audit help avoid misunderstandings with respect to the audi “eaaieta Believe... Claim. page 132Chapter 4 - Overview of the Audit Process and Preliminary Activities Form and Content of engagement letter The form and content of audit engagement letters may vary for each client, but they would generally include reference to: 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. IMPORTANT NOTES: > flaw or regulation prescribes in sufficient detail the terms of the audit engagement, the auditor need not record them in a written agreement, except for the fact that such law or regulation applies and that management acknowledges and understands its responsibilities. > Even if the objective and scope of an audit and the responsibilities of management and of the auditor may be sufficiently established by law of a particular country, the auditor may nevertheless consider it appropriate to include the matters in an engagement letter for the information of management. Furthermore, an audit engagement letter may make reference to, for example: (RA FORMS) a. The presence of audit Risk (unavoidable risk because of inherent limitations of audit) Unrestricted Access to whatever records The financial reporting Framework used . Objective of the audit The form of any Reports or other communication Management's responsibility Elaboration of the Scope of the audit empans The auditor may also wish to include in the letter: (FRAP Reports) a. Basis in which Fees are computed and any billing arrangements b. Expectation of receiving Representation letter c. Acknowledgment of management of terms of agreement d. Arrangements regarding the Planning of the audit e. Description of any other letters or Reports Aim... Believe... Claim... Page 133nd Preliminary Activities Id also be made: it a Chapter 4 — Overview of the Audit Process ment of other auditors ang ints cou When relevant, the following points cove * Arrangements concerning the invol experts insome sre be ieolverent of internal auditors ang ing the i *¢ Arrangements concerning other staff of the entity. - | an * Arrangements to be made with the previous auditor, if any, in the case of initial audit. 7 a Any restriction of the auditor's liability when such possibility exists Areference to any further agreements between the auditor and the entity. | . Any obligations to provide audit working papers to other parties. Example of an Audit Engagement Letter ; " Below example was lifted from PSA 210. The following is an example of an audit engagement letter for an audit of general-purpose financial statements prepared in accordance with Philippine Financial Reporting Standards. tae To the appropriate representative of management or those charged with governance of ABC Company: {The objective and scope of the audit] You have requested that we audit the financial statements of ABC Company, which comprise the balance sheet as at December 31, 20X1, and the income statement, statement of changes in equity and cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory information. We are pleased to confirm our acceptance and our understanding of this audit engagement by means of this letter. Our audit will be conducted with the objective of our expressing an opinion on the financial Statements. [The responsibilities of the auditor) We will conduct our audit in accordance with Philippine Standards on Auditing (PSAs). Those standards require that we comply with ethical re: jirements and plan and perform the audit to obtain Feasonable assurance ab sit whether the financial statements are free from Material misstatement he wh tne performing procedures to obtain audit evidence ab int. An audit in a disclosures in the financial statements. The procedun out the amounts he auditor's judgment, including the assessment . Selected depend on ol misstatement of the financial statements, whether due te = as of dt ‘aud or error. also includes evaluating the appropriat reness i het. reasonableness of accounting estimates or fe ounting Policies used and the evaluating the overall Presentation of the financial Management, as well ‘atements,Chapter 4 - Overview of the Audit Process and Preliminary Activities 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. In making our risk assessments, we consider internal control relevant to the entity's preparation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. However, we will communicate to you in writing concerning any significant deficiencies in internal control relevant to the audit of the financial statements that we have identified during the audit. [The responsibilities of management and identification of the applicable financial reporting framework] Our audit will be conducted on the basis that [management and, where appropriate, those charged with governance] acknowledge and understand that they have responsibility: a. For the preparation and fair presentation of the financial statements in accordance with Philippine Financial Reporting Standards; 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 ¢. To provide us wit! i, 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; ii, Additional information that we may request from [management] for the purpose of the audit; and ili. Unrestricted access to persons within the entity from whom we determine it necessary to obtain audit evidence. b. As part of our audit process, we will request from [management and, where appropriate, those charged with governance], written confirmation concerning representations made to us in connection with the audit. We look forward to full cooperation from your staff during our audit. [Other relevant information} [insert other information, such as fee arrangements, billings and other specific terms, as appropriate.] [Reporting] [insert appropriate reference to the expected form and content of the auditor's report.) asteiaeeeseee meee ceaeemeneeee es eeeaneemeneel Aim... Believe... Claim... Page 135Chapter 4 — Overview of the Audit Process and Preliminary Activities The form and content of our report may need to be amended in the light o¢ our audit findings. Please sign and return the attached copy of this iter indicate Your acknowledgement of, and agreement with, the arrangements for OUT audit ofthe financial statements including our respective responsibilities. XYZ & Co, Acknowledged and agreed on behalf of ABC Company by (Signed) Name and Title Date S—S_K Audit of Components When the auditor of a parent entity is also the auditor of its subsidiary, branch, or division (component), the factors that influence the decision whether to senda separate engagement letter to the component include the following (CLOSI): * Who appoints the Component auditor; © Legal requirements in relation to audit appointments; © Degree of Ownership by parent; © Whether a Separate auditor's report is to b: and * Degree of Independence of the component’ parent entity. issued on the component; ‘Ss management from the Recurring Audits On recurring audits, the auditor should consider whether circumstances the engagement to be revised and whether there is@ client of the existing terms of the engagement. The jot to send anew engagement letter each period. However, the following factors may mak: i € it appropriate to revise the terms of the engagement, remind the entity of existing terme and/or send ane” auditor may decide ni letter: © Any indication that the client misunderstands the objective and scope the audit. i + Any revised or special terms of the engagement © Arecent change of management, board of. directors or ownership. ye ae PageChapter 4 — Overview of the Audit Process and Preliminary Activities © Asignificant change in ownership. * Asignificant change in nature or size of the client’s business. * Achange in legal or regulatory requirements. * Achange in financial reporting framework adopted in the preparation of the financial statements, * Achange in other reporting requirements. ACCEPTANCE OF A CHANGE IN ENGAGEMENT If, prior to completing the audit engagement, the auditor is requested to change the audit engagement to an engagement that conveys a lower level of assurance, the auditor shall determine whether there is reasonable justification for doing So. The auditor shall not agree toa change in the terms of the audit engagement where there is no reasonable justification for doing so. Below are examples of circumstances that could lead to change in engagement and whether or not they are reasonably justifiable: 7 Reasonably Circumstances justifiable? 1.Change in circumstances affecting the need for the service v 2.A misunderstanding as to the nature of an audit or related v services originally requested 3.A restriction on the scope of the engagement, whether imposed by management or caused by circumstances 4.If the change relates to information that is incorrect, incomplete or otherwise unsatisfactory 5.The auditor is unable to obtain sufficient appropriate audit evidence regarding assertions Auditor's response If the terms of the audit engagement are changed, the auditor shall agree on and record the new terms of the engagement i letter or other suitable form of written agreement. and Management nan engagement 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 law or regulation; and b. Determine whether there is any obligation, eith, otherwise, to report the circumstances to other pa charged with governance, owners or regulators, Possible under applicable er contractual or rties, such as those Page 137Chapter 4 — Overview of the Audit Process and Preliminary Activities In summary, the auditor’s response would be: a.Stop performing the old engagement b.Stop referring to the old engagement, Yes }>) except when the new engagement involves agreed-upon procedures c. Start performing the new engagement. ali procedures to be performed, information to be obtained, and reports to be issued should be related to new engagement. Is there a reasonable justification? a. Continue the original audit engagement b.When prohibited to continue, withdraw from the audit engagement No >} Note: Every time withdrawal is made, the auditor should consider the necessity of communicating the reasons to appropriate level of management.