Activités du cabinet d'audit (document en anglais).

DOSSIER AUDIT

1/ Before taking on this new client, what kind of investigations auditors need to perform?

The first subject of investigation is related to the ethical requirement.

The auditor has to know whether he can work while respecting the ethical requirements, including those concerning the independence, relating to financial statement audit engagements.

The auditor’s independence from the entity safeguards the auditor’s ability to form an audit opinion without being affected by influences that might compromise that opinion. His independence enhances his ability to act with integrity and confidentiality, to be objective, and to maintain an attitude of professional skepticism, professional competence and due care, which are the fundamental principles of professional ethics.

Auditors shall determine whether acceptance would create any threats to compliance with the fundamental principles.

Threat of independence may occur if the management impose a limitation on the scope of the his work in an audit engagement. Whether auditor believes the limitation will result in the inability to express an opinion on the financial statements, he should not accept the new client.

Potential threats to integrity or professional behaviour may be created from, for example, questionable issues associated with the client.

Client issues that, if known, could threaten compliance with the fundamental principles include, for example, client involvement in illegal activities (such as money laundering), dishonesty or questionable financial reporting practices.

The fundamental principle of professional competence and due care imposes an obligation to auditors to provide only those services that the auditors is competent to perform.

That’s why, before accepting a specific client engagement, auditors shall determine whether acceptance would create any threats to compliance with the fundamental principles.

For example, a self-interest threat to professional competence and due care is created if the engagement team does not possess, or cannot acquire, the competencies necessary to properly carry out the engagement.

Furthermore, the auditor shall know if financial reporting framework to be applied in the preparation of the financial statements is acceptable.

Additionally, he is obliged to obtain the agreement of the company’s management that it acknowledges and understands its responsibility for the preparation of the financial statements

Finally, the auditor has to check if he can:

- 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

- Additional information that he may request from management for the purpose of the audit

- Unrestricted access to persons within the entity from whom he determines it necessary to obtain audit evidence.

If all these preconditions for an audit are not present, the auditor shall discuss the matter with management.

Where it is not possible to reduce the threats to an acceptable level, auditors shall decline to enter into the client relationship.

The second subject of investigation is related to the understanding of the entity and its environment, including the entity’s internal control.

First, the auditor shall obtain an understanding of the following:

- Relevant industry, regulatory, and other external factors including the applicable financial reporting framework.

- The nature of the entity, including

- its operations;

- its ownership and governance structures;

- the types of investments that the entity is making and plans to make, including investments in special-purpose entities

- the way that the entity is structured and how it is financed

- The entity’s objectives and strategies, and those related business risks that may result in risks of material misstatement

- The entity’s selection and application of accounting policies, including the reasons for changes thereto. The auditor shall evaluate whether the entity’s accounting policies are appropriate for its business and consistent with the applicable financial reporting framework and accounting policies used in the relevant industry.

Furthermore, the auditor shall obtain an understanding of internal control relevant to the audit.

When obtaining an understanding of controls that are relevant to the audit, the auditor shall evaluate the design of those controls and determine whether they have been implemented, by performing procedures in addition to inquiry of the entity’s personnel.

The auditor shall obtain an understanding of whether the entity has a process for identifying business risks.

Finally, the auditor shall obtain an understanding of the information system, including the related business processes, relevant to financial reporting. For example, the auditor can inquire:

- The procedures, within both information technology (IT) and manual systems, by which those transactions are recorded, processed, transferred to the general ledger and reported in the financial statements;

- The related accounting records

- How the information system captures events and conditions that are significant to the financial statements

- Controls surrounding journal entries

Where it is not possible to obtain all these information, auditors should not refuse this client relationship.

You can find in this file, the pre audit questionnaire used to enquiry Smiley Corp Company.

2/What would be the interest of communicating with the predecessor auditor?

The auditor’s previous experience with the entity and audit procedures performed in previous audits may provide the auditor with information about such matters as:

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