UL INTEGRATED CPA AU-

REVIEW

UNIVERSITY OF LUZON
COLLEGE OF
ACCOUNTANCY CPA
REVIEW CENTER

AUDITING
THEORY Client
Acceptance

Audit Process Model:

PHASE I: Client Acceptance
PHASE II: Planning the Audit
PHASE III: Testing and
Evidence PHASE IV:
Evaluation and Reporting

PHASE I: CLIENT ACCEPTANCE

Objective Determine both acceptance of a client and acceptance by a client.
Decide on acquiring a new client or continuation of relationship with an existing
one and the type and amount of staff required.
Procedures 1. Evaluate the client’s background and reason for the audit.
2. Determine whether the auditor is able to meet the ethical requirements regarding
the client.
3. Determine need for other professionals.
4. Communicate with predecessor auditor.
5. Prepare client proposal.
6. Select staff to perform the audit.
7. Obtain an engagement letter.

 Pre-engagement activities

1. The auditor should perform the following activities:

a. Perform procedures regarding the acceptance (in the case of initial audit) or continuance
(in the case of current audit) of the client relationship and the specific audit engagement.
b. On initial audit, communicate with the previous auditor, where there has been a change
of auditors, in compliance with relevant ethical requirements.
c. Evaluate compliance with ethical requirements, including
independence. d. Establish an understanding of the terms of
the engagement.

2. The purpose of performing these preliminary engagement activities is to help ensure

that the auditor has considered any events or circumstances that may adversely affect the
auditor’s ability to plan and perform the audit engagement to reduce audit risk to an
acceptably low level.

 Preconditions for an Audit

 In order to establish whether the preconditions for an audit are present, the auditor shall:
a. Determine whether the financial reporting framework to be applied in the
preparation of the financial statements is acceptable; and
b. Obtain the agreement of management that it acknowledges and understands its
responsibility:
(i) For the preparation of the financial statements in accordance with the applicable
financial reporting framework, including where relevant their fair presentation;
(ii) For such internal control as management determines is necessary to enable the
preparation of financial statements that are free from material misstatement, whether
due to fraud or error; and
(iii) To provide the auditor with:

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(a) 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;
(b) Additional information that the auditor may request from management for the
purpose of the audit;
and
(c) Unrestricted access to persons within the entity from whom the auditor
determines it necessary to obtain audit evidence.

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1. Which of the following factors would be most likely to cause a professional auditor in public
practice to decline a new engagement?
a. The prospective client has already completed its physical inventory count.
b. The auditor lacks understanding of the prospective client’s operations and industry.
c. The auditor is unable to review the predecessor auditor’s working papers.
d. The prospective client is unwilling to make all financial records available to the
auditor.

2. In a financial statement audit, management is responsible for:

a. Providing staff to assist the auditor on the engagement.
b. Making all financial records and information available to the auditor.
c. Reporting to the audit committee.
d. Proposing adjusting journal entries based on the audit results.

3. Which of the following will an auditor most likely discuss with the former auditors of a
potential client prior to acceptance?
a. Integrity of management.
b. Reasons for changing audit firms.
c. Disagreements with management regarding accounting principles.
d. All of the above must be discussed.

4. The auditor commences to understand the client and related risks of the organization for what
purpose?
a. To determine the audit opinion that will be issued.
b. To determine the appropriate understanding of internal controls
by management. c. To determine the detection of audit procedures
in the period under audit.
d. To determine whether the auditor has sufficient knowledge to perform the
engagement.

5. Which of the following is typically not a significant factor that an auditor will consider in the client
acceptance of
Stitch Magee Co.?
a. Brad Stitch, the president and 50% owner of Stitch Magee was investigated for securities
violations four years earlier.
b. Stitch Magee Co. is a public company in the high technology industry.
c. Stitch Magee Co. is a manufacturing company that procures much of its raw materials
from the Baguio
City.
d. Stitch Magee Co. sells 25% of its inventory to Nani, Inc. which is owned primarily by Nani
Magee, the father of
Stitch Magee's treasurer, vice president of finance and
50% owner.

6. The auditor will utilize many resources to assess management integrity in the client
acceptance process. Which of the following will an auditor most likely refrain from using in
this search?
a. predecessor auditor.
b. other professionals in the business
community. c. public databases.
d. All of the above will typically be used by an auditor in the search.

7. Before accepting an audit engagement, a successor auditor should make specific inquiries
of the predecessor auditor regarding:
a. Disagreements the predecessor auditor had with the client concerning
auditing procedures and accounting principles.
b. The predecessor’s evaluation of matters of continuing accounting significance.

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c. Opinion on any subsequent events occurring since the predecessor auditor’s report was
issued.
d. The predecessor’s assessments of inherent risk and judgments about materiality.

8. Which of the following matters is generally included in an auditor’s engagement letter?

a. Management’s liability for illegal acts.
b. The factors to be considered in setting judgments about audit risk.
c. Management’s responsibility for the entity’s financial statements.
d. Management’s responsibility to investigate internal control deficiencies.

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9. Which of the following procedures would be an important measure to prevent “opinion

shopping”?
a. Documenting the terms of engagement.
b. Communicating with the predecessor auditor.
c. Preparing client proposal.
d. Evaluating the client’s background.

10. JaNae Jones, CPA is proposing on a prospective audit engagement for White Quack
Enterprises. After obtaining written permission of White Quack, JaNae is required to perform
what procedure prior to accepting it as a new client?
a. Provide full disclosure of fees that will be billed to White Quack.
b. Contact the former auditor to ensure all disagreements have been resolved.
c. Contact the former auditor about certain matters of interest in JaNae's decision to
accept White Quack as a client.
d. Contact the former auditor to determine if all fees have been paid, the change in auditors
have been approved and integrity issues have been overcome.