ACCA AA Syllabus B. Planning And Risk Assessment - Preconditions for an audit - Notes ^{2 / 10}

The risk to the auditor is ‘reputation risk’ i.e. that they will be associated with a poorly regarded client.

An auditor is required under ISA 315 to gain an understanding of their client.

Questions to ask will be:

1. Is the client involved in any fraudulent/illegal activities?

2. What is the nature of the industry in which they are involved – is it depressed?

3. Has the client had a history of changing auditor regularly or had qualified audit reports in the past?

4. Do client directors understand their role and are they able to carry it out?

5. Are management trustworthy?

Other Areas to help gain an understanding are:

• The market and its competition

• Legislation and regulation

• Regulatory framework

• Ownership of the entity

• Nature of products/services and markets

• Location of production facilities and factories

• Key customers and suppliers

• Capital investment activities

• Accounting policies and industry specific guidance

• Financing structure

• Significant changes in the entity on prior year

Pre-Conditions for an Audit

Auditors should only accept a new audit engagement when it
has been confirmed that the preconditions for an audit are present..

• Is the FR framework acceptable?

  Consider the entity & the purpose of the FS 

  Perhaps, also, laws say which FR framework should be used

• Do Management accept their responsibilities?

  For preparing FS 
  For internal controls
  For giving the auditor all relevant information they request

If the preconditions for an audit are not present..

• The auditor shall not accept the proposed audit engagement