Audit procedures

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UNIVERSITY OF NAIROBI
Principles of auditing term paper

GROUP 3

NAME REG. NO
1. KINUTHIA ROSEMARYD33/2395/2011
2. OMONDI BRADLEYD33/2389/2011
3. KEMUNTO DOLLYD33/2375/2011
4. MENGICH NOAHD33/2460/2011

DECLARATION

We declare that this assignment is our original work and has not been submitted elsewhere for examination, award of a degree or publication. Where other people’s work, or our own work has been used, this has properly been acknowledged and referenced in accordance with the University of Nairobi’s requirements

KINUTHIA R.W. D33/2395/2011 …………………….
MICHIRA D. K. D33/2375/2011 …………………….
OMONDI B.O. D33/2389/2011 …………………….
MENGICH N.K.D33/2460/2011 …………………….

TABLE OF CONTENTS

CHAPTER 4; CLIENT ACCEPTANCE
4.1 INTRODUCTION
The client acceptance stage has two objectives;
a) Examining the proposed client to determine if there is any reason to reject the engagement (acceptance of the client). To do so, the auditor obtains a preliminary understanding of the client, in order to both evaluate the client’s background and the risks associated with accepting the engagement. b) Convincing the client to hire the auditor (acceptance by the client). The auditor must thus understand his relationship to the client to enable him consider if the ethical and professional requirements (independence, competence, etc.) typical to the specific engagement can be met. Client acceptance and continuance procedures are the foundation of the risk assessment process, primarily at the financial statement level. Management's integrity is one of the elements of risk at the financial statement level. High risk at the financial statement level requires more evidence to mitigate the risk. Low risk requires less evidence. As adapted from a lately published weekly review, “SQCS No. 8, effective January 1, 2012, requires that a CPA firm establish and document policies and procedures for the acceptance and continuance of clients and engagements.” The purpose of this standard is to integrate the client acceptance and continuance evaluation into the audit process as a key element in mitigating litigation and business risk. The standard emphasizes that a firm should be aware that the integrity and reputation of a client's management could affect the reliability of a client's accounting records and financial statements and, therefore, affect the CPA firm's reputation or potential involvement in litigation. The procedures to client acceptance are highlighted as follows; (a) Acquiring knowledge of the client’s business;

(b) Examining the audit firm’s ethical requirements and technical competence; (c) Considering the possible use of other professionals (including outside specialist) in the audit; (d) Communicating with the predecessor auditor;

(e) Preparing the client proposal and
(f) Assignment of staff and the submission of the terms of the engagement in the form of an audit engagement letter. Discussed in details is as follows;
4.2 EVALUATE CLIENT’S BACKGROUND
While client acceptance procedures may differ among firms, the common objective is to gain insight into the prospective client’s past business practices, the integrity of the management team and to identify any issues that may create a breach of the accounting firm’s professional obligations. This boils down to two key elements: 1) What is the relationship between the prospective client and current and former lawyers, bankers and with the predecessor accountant? A firm should establish how the management team interacts with other professionals and the reasons why the firm is now seeking a new or different accounting firm. While the prospect may be changing firms for purely legitimate reasons, it is advisable to verify that the reasons are not due to a fee dispute or because the prospective client is opinion shopping. Some questions that should be answered are: a) What was relationship with prior...
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