Chap4

III.Comprehensive Case
MORALES, CABRERA, & CO., CPAs
1. a. Hiring / Professional requirements
b. To ensure that personnel who will be performing audits have adequate
technical training and proficiency.
c. New accountants hired must have an accounting degree from an accredited
school.
2. a. Advancement / Professional requirements
b. To ensure personnel are qualified to do the tasks they are assigned.
c. An in-charge accountant must have served as a staff auditor on an audit in
the client’s industry.
3. a. Skills and Competence
b. To ensure that personnel continue to be updated on changes in accounting
or auditing standards.
c. Personnel will participate in forty hours of continuing education per year.
4. a. Consultation
b. To ensure that personnel have access to persons with more experience in
dealing with problems they have encountered.
c. For each industry for which the office has a client, a specialist will be
identified.
5. a. Independence
b. To ensure that personnel meet PICPA guidelines for independence.
c. Firm personnel must list their investments. Personnel must report any
stock acquisitions.
6. a. Supervision
b. To ensure that work performed meets the firm’s standard of quality.
c. Staff personnel are to follow firm guidelines for working paper
development.
7. a. Inspection / Review
b. To verify that quality control procedures are being followed.
c. Inspect the audit programs for all engagements.
8. a. Acceptance and retention of clients
b. To minimize the risk associated with clients.
c. New clients must be investigated by a private investigative agency.
9. a. Assigning personnel to engagements
b. To ensure that personnel posses the degree of technical training and
proficiency required for an engagement.
c. To be eligible to be senior on an engagement, a person must have had
experience in the industry.

Chap 4
III.Comprehensive Cases
Case 1.a. Prior to acceptance of the engagement, Argante & Tan should have
communicated with the predecessor auditor regarding:
• Facts that might bear on the integrity of management.
• Disagreements with management concerning accounting
principles, auditing procedures, or other significant matters.
• The predecessor’s understanding about the reason for the change.
• Any other information that may be of assistance in determining
whether to accept the engagement.
b. The form and content of engagement letters may vary, but they would
generally contain information regarding:
• The objective of the audit.
• The estimated completion date.
• Management’s responsibility for the financial statements.
• The scope of the audit.
• Other communication of the results of the engagement.
• The fact that because of the test nature and other inherent limitations of any system of internal control, there is an unavoidable risk that even
some material misstatement may remain undiscovered.
• Access to whatever records, documentation, and other information
may be requested in connection with the audit.
• Arrangements with respect to client assistance in the performance of the audit engagement.
 • Expectation of receiving from management written confirmation concerning representations made in connection with the audit.
• Notification of any changes in the original arrangements that might be necessitated by unknown or unforeseen factors.

• Request for the client to confirm the terms of the engagement by acknowledging receipt of the engagement letter.
• The basis on which fees are computed and any billing arrangements.
Case 2.a. Typical engagement letter generally includes the following:
• The name and address of the person or persons who retained the auditor to perform the auditing services.
• An opening paragraph that confirms the understanding of the auditor and the client.
• A summary of significant events that lead to the retention of the services of the auditor.
• A general description of the CPA firm that will conduct the examination.
• A statement that the examination will be performed in accordance with generally accepted auditing standards.
• A description of the scope of the services to be rendered, which should establish the nature of the engagement.
• Any scope restrictions or special limitations and their effect on the auditor’s report.
• A statement regarding the auditor’s responsibility for the detection of fraud.
• An indication of the possible use of client personnel in connection with the audit work to be performed.
• A statement that the auditor will provide a management letter if required in the circumstances.
• The method and timing of billings as well as billing rates and fee arrangements.
• Space for the client representative’s signature, which indicates “acceptance” of the letter and the understandings,
therein.
b. The benefits of preparing an engagement letter include the avoidance of possible problems between the CPA and the
client concerning (1) the scope of the work, (2) the service to be rendered, and (3) the audit fee. In addition, the “in-
charge” auditor conducting the examination can avoid misunderstanding the nature and scope of the engagement if
the engagement letter is included in the permanent section of the audit working papers. The letter should eliminate
misunderstandings and confusion about the type of financial statements to be examined, the estimated report date,
and the type of opinion expected. In addition to avoiding possible misunderstandings, any legal problems relating to
the auditor’s failure to perform certain procedures can be reviewed with reference to the contractual commitment
assumed. (For example, if scope limitations prevent the auditor from performing normal audit procedures, the
auditor
cannot be legally responsible if an irregularity is not detected when clearly
it would have been detected if such procedures were performed.)
The engagement letter is also useful as a reference document when
preparing for future engagements.
c. The CPA usually prepares the engagement letter as a follow-up to a verbal understanding that he and his client have
reached. It is desirable that the client endorse and return an approved copy of the engagement letter to the CPA. It
also is acceptable for the client to prepare his own letter summarizing his understanding of the nature of the
engagement.
d. Preferably the engagement letter should be sent at the beginning of the
engagement so that misunderstandings, if any, can be remedied.
e. Obviously, the engagement letter will be most useful in clarifying misunderstandings on a first engagement. But it is
desirable that the letter be renewed periodically. Client personnel or the nature of the engagement may change, and
the resubmission of the letter gives both parties an opportunity to review the circumstances. Accordingly, for
recurring examinations of financial statements, it is appropriate to prepare an engagement letter at the start of each
examination. For other continuing engagements, the engagement letter also should be updated periodically –
probably on a yearly basis.
Case 3.a. The procedures that Francis should follow prior to accepting the
engagement include the following:
(1) Francis should explain to Nikolai the need to inquire of Jo and should
request permission to make such inquiries.
(2) Francis should request that Nikolai authorize Jo to respond fully to all of Francis’ inquiries since Jo would be
prohibited from disclosing confidential information obtained in the course of his professional engagement with
Nikolai.
(3) Francis should advise Jo of Nikolai’s decision to change auditors as an
act of professional courtesy.
(4) Francis should make reasonable inquiries of Jo regarding matters that will aid in deciding whether to accept the
engagement. (Francis’ inquiries should include questions regarding facts which might bear on the integrity of
management, disagreements with management as to accounting principles, auditing procedures or other significant
matters, and Jo’s understanding of the reason(s) for the change of auditors.)
(5) Francis should weigh all the information received from Jo. If Jo does not respond fully to Francis’ questions, Francis
should consider the implications of the limited response in deciding whether to accept the engagement.