Pre-engagement Activities

Consider the following:

1 Competence, capabilities and resources of the engagement team

i We should consider whether we have the necessary and sufficient competencies and resources to audit the entity / gro
i.e. skills, resource and time
i the professional standards and applicable legal and regulatory requirements that must be adhered to and whether the
i whether the firm has sufficient personnel with the necessary competence and capabilities;
i the technical expertise within the team or access to other auditors or experts who do have the relevant expertise (ISA 6
i knowledge of the relevant industry in which the client operates;
i the audit team’s ability to apply professional judgement;
i the ability to comply with the firm’s quality control policies and procedures as per ISQC 1;
i the availability of personnel to perform quality control reviews; and

The entity operates in the XXXXX industry - does our team possess these necessary knowledge and competencies?
Only XXX staff available to perform the audit. There is a concern that this may not be sufficient as group that operate
XXXX was only appointed during XXXX and there might not be adequate time to perform an interim audit or to gain a
The audit deadline is tight, there is a concern that sufficient time to complete the audit
XXXX should consider engaging an expert for the audit of complex transactions relating to manufacturing as this is th
XXX should consider if there is sufficient sufficient knowledge and experience in the legal and regularity environment

2 The relevant ethical requirements

• There is a familiarity threat, as the engagement partner is married to the CEO of the
audit client.
• There is a self-interest threat – the audit partner is married to the CEO and she has
a financial interest in ABC Ltd.
• There is an intimidation threat, as the audit team might be reluctant to ask
challenging questions for fear of upsetting the audit partner’s spouse.
• Based on the above, the threat to independence is seen as significant.
• It will not be appropriate for the audit partner to be involved in the audit of ABC Ltd.

• The independence of the audit partner and of the audit firm appears to have been impaired. (1)

• There is an advocacy threat. Two weeks prior to AGE being awarded a tender to audit DanChrome, the audit partner was req
by the major shareholders at the time to sell their shareholding in DanChrome on their behalf. (2)

• The audit partner (Denzil Phillips) should not be involved in the audit or sale negotiation as a safeguard.
DISCUSS COMPREHENSIVELY

3 The integrity of the principal owners, key management and governance of the entity and those charged with governa

i The identity and business reputation of the client’s principal owners, key management, and those charged with governa
i The nature of the client’s operations, including its business practices.
i The nature of the client’s operations, including its business practices.
i Information concerning the attitude of the client towards matters such as
− an aggressive interpretation of accounting standards and the internal control environment; and
− a reputation for maintaining poor relationships with its auditors.
i The client’s attitude towards paying the audit fee. (Will they be able to pay the audit fee, or are they only concerned wi
i Any indications that the client will impose a limitation on the audit.
i Indications that the client might be involved in criminal activities.
i The reasons for the proposed appointment of the firm and non-reappointment of the previous firm (indicate the reason
i The identity and business reputation of related parties.

There appears to be concerns about the integrity of the client, as SamCoal is involved in illegal mining.
However, it should be considered that the previous auditors resigned due to their lack of resources and not because t
OR prior auditors resigned due to concerns they had regarding management's integrity

The fact that the remuneration of the directors is decided by the audit committee raises concerns about the complian
STATE NON-COMPLIANCE WITH KING - SPEAKS ABOUT MANAGEMENT INTEGIRTY

The MD and CEO have been with DanChrome for 10 years, which decreases AGE's standing risk.

The entity made a loss during the current year, however this does not appear significant enough to hinder the entity'
PROVIDE A REASON WHY LOSS WAS MADE AND WHY NO EFFECT
OR The entity is currently has going concern issues which may hinder the entity's ability to pay the audit fee

4 Other significant matters

i Any changes that occurred during the year for existing clients.
i Information obtained from communication with the predecessor auditor

i Whether there is a legal vacancy to appoint the auditors (sec 91 of the Companies Act).
i Any professional and legal responsibilities that might arise (sec 45 and 46 of the Auditing Profession Act).

The professional relationship with the client. Certain factors suggest that such a relationship would in fact be desirab
− DanChrome has a good reputation in the industry.
− The previous auditors enjoyed a long association with the company.

•We have to consider whether there is a legal vacancy. The fact that the previous auditors resigned could possibly ind

• We should Establish the professional and legal responsibilities in terms of sections 45 and 46 of the Auditing Profes

5 Terms of the engagement

The terms of the engagement should be agreed on in the engagement letter highlighting the responsibility of the aud
that of management. The engagement letter should also highlight the auditors' responsibility to report reportable
irregularities.
OR
There is no engagement letter detailing the terms of the engagement that are agreed on highlighting the responsibilit
With no engagement letter, it is of concern that no highlight of the auditors' responsibility to report reportable irregu
resources to audit the entity / group.

st be adhered to and whether the firm personnel have experience with these requirements, or the ability to gain the necessary skills and k

have the relevant expertise (ISA 600, ISA 610 and ISA 620);

knowledge and competencies?

e sufficient as group that operates in geographically spread areas / large entity to be audited in a tight audit deadline
form an interim audit or to gain an understanding of the business.

ting to manufacturing as this is the first time XXXX is auditing a company in the manufacturing industry
legal and regularity environment of the entity.

Chrome, the audit partner was requested

f. (2)

a safeguard.
y and those charged with governance

nt, and those charged with governance.

onment; and

fee, or are they only concerned with keeping the fee as low as possible?)

previous firm (indicate the reason for the change of auditors).

d in illegal mining.
ck of resources and not because they had concerns about management’s integrity.

aises concerns about the compliance of the company with regard to corporate governance.

anding risk.

cant enough to hinder the entity's ability to pay the audit fees.

ility to pay the audit fee

ting Profession Act).

ationship would in fact be desirable for us,

uditors resigned could possibly indicate that there is a legal vacancy in terms of section 91 of the Companies Act. (1)

45 and 46 of the Auditing Profession Act due to possible reportable irregularities resulting from illegal mining operations by SamCoal M

hting the responsibility of the auditors and

onsibility to report reportable

d on highlighting the responsibility of the auditors and that of management. (1)

sibility to report reportable irregularities are included.
gain the necessary skills and knowledge;

dit deadline
ning operations by SamCoal Mines (forming part of the DanChrome Group)