PERFORMING

PRELIMINARY
ENGAGEMENT ACTIVITIES
Overview
1. Engagement Acceptance Procedures
2. Basis of Engagement
 CLIENT ACCEPTANCE AND CONTINUANCE

• Auditors carefully determine what engagements to accept to manage auditor’s business risks ( e.g.
clients involvement is illegal activities like money laundering and fraudulent financial reporting
can lead to unpaid fees, loss of reputation (auditor’s most important asset), and lawsuits.
• Acceptance or non- acceptance of a client depends on auditor’s professional judgment and risk
tolerance.
• When is the engagement acceptable by the auditor?
• 1. when the auditor is competent and has capabilities, time and resources to perform the
engagement
• 2. complies with the relevant ethical requirements, and
• 3. considers client’s integrity, including communicating with predecessor auditor
• Competence, Capabilities and Resources:
• 1. The auditing firm has sufficient personnel who have competence, capabilities and knowledge of
banking industry for bank clients
• 2. experience or knowledge with regulatory requirements, e.g. SEC, BSP
• 3. experts, if needed such as work of actuaries, appraisers
• 4. individuals who can make quality review
• 5. time to complete the engagement within the reporting deadline

• Auditor’s Compliance with Relevant Ethical Requirements:

• 1. Integrity
• 2. Objectivity
• 3. Professional Competence and Due Care
• 4. Confidentiality
• 5. Professional Behavior, 6. Independence
THE AUDITOR SHALL IDENTIFY, EVALUATE

• And address threats to compliance with these principles. If threats are significant, the auditor
shall apply safeguards to eliminate or reduce them to an acceptable level so as not to compromise
compliance.
• INTEGRITY OF CLIENT:
• 1. The identity and reputation of owners and officers, including related parties
• 2. The nature of the client’s business
• 3. The attitude of the owners and officers towards accounting and control
• 4. The client’s aggressiveness to maintaining low auditor’s fees as possible
• 5. Indications of an inappropriate limitation in the scope of work
• 6. Indications of client’s involvement in criminal activities
• 7. The reasons for proposed appointment and non-reappointment of previous firm
• SOURCES OF INFORMATION:
• 1. Communication with other accountants
• 2. Inquiry of third parties (bankers, legal counsel and industry peers)
• 3. Background searches of relevant databases
 COMMUNICATION WITH PREDECESSOR
AUDITOR
• Predecessor auditor refers to the auditor from a different audit firm, who audited the FS of an entity in
the prior period and has been replaced by the current auditor
• The successor auditor initiates the communication. The successor auditor shall advise the client of the
intention and request permission to contact the predecessor auditor preferably in writing.
• If the client grants permission, the successor auditor inquires of predecessor auditor:
• 1. Integrity of client
• 2. Disagreements with management about audit procedures of accounting principles
• 3. Communication with audit committee about fraud, illegal acts, or internal control
• 4, Reason for change in auditor.
 BEFORE RESPONDING TO THE QUERIES,

• Confidentiality requires predecessor auditor to first obtain client permission. In unusual

circumstances, such as legal dispute between the client and predecessor auditor, the predecessor
‘s response can be limited to stating that no information will be provided. If the client gives no
permission or the predecessor provides no comprehensive response, the successor should
consider the desirability of engagement, without other considerable investigation such as
inquiries of third parties or client background investigation.s
 THIRD PARTY COMMUNICATION AND
BACKGROUND SEARCHES
• A successor auditor may make inquiries of attorneys, other CPAs. Banks, and other businesses,
and searches public databases ( e.g. internet) or the investigators to obtain client information.
• DECLINING AN ENGAGEMENT:
• When the auditor withdraws from the engagement, the auditor shall
• 1. discuss with client’s management
• 2. If appropriate, determine and discuss reasons for withdrawal
• 3. consider professional, regulatory or legal reportorial requireemnts, and
• 4. document significant issues, consultations, conclusions and basis
• 5. Reference to auditor’s reports and possible modifications, thereon
• ADDITIONAL MATTERS THAT COULD BE INCLUDED ARE ARRANGEMENTS
REGARDING:
• 1. Planning and performance of audit
• 2. Involvement of other auditors and experts
• 3. Involvement of predecessor auditor with respect to opening balances, and
• 4. Other matters
 OTHER MATTERS INCLUDE:

• Any restrictions of the auditor’s liability, if possible,

• The basis on which fees are computed and billed
• Any obligations of auditor to provide working papers to other parties and
• Any further agreement between the auditor and the client
• Agreements shall be reflected in an Engagement Letter (serves as a contract between the client
and the auditor)
 AUDIT FEES, COMPUTATION AND BILLING

• The audit fees should reflect the fair value of work taking into consideration the ff:
• 1. The skill and knowledge involved
• 2. The level of training and experience requirement
• 3. The time to be consumed
• 4. The degree of responsibility and integrity
• Charging lower fees than that of another auditor in itself is not unethical
• However, the fees should not be too low that it compromise the quality of the audit
 BILLING METHODS

• 1. Fixed or flat fee basis – the client is billed lumpsum, all inclusive amount
• 2. Actual time charges (per diem) basis –based on actual hours spent multiplied by the rate per
hour as agreed
• 3. Maximum fee basis – The client is charged on a per diem basis, but not to exceed up to a
certain maximum amount
• 4. Retainer’s fee basis – The client is billed a fixed fee periodically either on a monthly, semi-
annually or annual basis
 RECURRING AUDITS – UPDATING THE
ENGAGEMENT LETTER
• The engagement terms may be confirmed without a new letter. However, circumstances may
require the auditor to send a new letter to client to include:
• 1. misunderstanding of the objective and scope
• 2. any revised or special terms
• 3. change in client’s circumstances such as senior management, ownership, entity’s nature or
size, legal or regulatory requirements and reporting requirements.