Question

1. Describe the purpose of the predecessor-successor auditor communications? What information should be communicated between the predecessor and the successor? Who has the responsibility to contact whom? Did E&W property disclose information to Price Waterhouse?
2. Ernst & Whinney performed a "review" for ZZZZ Best. What steps or procedures are used when doing "reviewed" financials for a company? How does it differ from an audit? How are reviewed financials and audited financials different when considering level of assurance to the users of financial statements?
3. What is an engagement letter? What types of things are included in the engagement letter?
4. Many students would argue that signing the confidential agreement restricted E&W from getting proper evidence. Thus; their scope was restricted. Create a valid reason why E&W would sign this agreement? If clients-impose restrictions so the scope of the audit is really restricted what type of opinion would you issue in this situation and why?
5. What are analytical procedures? How would they have helped in this audit?
6. When auditing accounts receivables there are a few procedures to verify that the a/r is valid and collectable. One acceptable test is to look to see if the a/r was paid after year end. This is normally reliable evidence. Why was it not in this situation?

Answer 1

1.

the term predecessor auditor refers to an auditor who has reported on the most recent audited financial statements or was engaged to perform but did not complete an audit of the financial statements and has resigned, declined to stand for reappointment, or been notified that his or her services have been, or may be, terminated.

The term successor auditor refers to an auditor who is considering accepting an engagement to audit financial statements .

The successor auditor should make specific and reasonable inquiries of the predecessor auditor regarding matters that will assist the successor auditor in determining whether to accept the engagement. Matters subject to inquiry should include—

• Information that might bear on the integrity of management.
• Disagreements with management as to accounting principles, auditing procedures, or other similarly significant matters.
• Communications to audit committees or others with equivalent authority and responsibility regarding fraud, illegal acts by clients, and internal-control-related matters.
• The predecessor auditor's understanding as to the reasons for the change of auditors.

AUDIT ENGAGEMENT LETTER

The audit engagement letter states the terms and conditions of the engagement, principally addressing the scope of the engagement and the terms of compensation for the firm.

They should include the following:

• The objective and scope of the audit;
• The responsibilities of the auditor;
• The responsibilities of management;
• The identification of an applicable financial reporting framework; and
• Reference to the expected form and content of any reports to be issued.

REVIEW VS AUDIT

An audit is the examination of the financial reports for an entity in order to determine whether the information presented reflects the financial position of the entity at a given date. An audit aims to identify material misstatements in the financial statements and includes, but is not limited to, misstatements resulting from fraud where reasonable suspicion exists. An audit provides a reasonable level of assurance in the form of a positive statement such as ‘presents fairly’ or ‘presents a true and fair view’. An audit does not give absolute assurance (as this would require testing every transaction which is impractical) but is the highest level of assurance provided by auditors. It involves detailed testing such as substantiating balances and evidence gathering.

A review on the other hand provides only limited assurance. The opinion given would be in a form such as ‘we have not become aware of any matter’ that the statements are not in accordance with the required framework. A review involves less detail than an audit and involves more enquiry of management/staff and analytical review work rather than substantiating balances. A review does not need to be carried out by a registered company auditor but their greater experience in this area typically means better value is delivered from the review.

ANALYTICAL PROCEDURES

Analytical procedures are a type of evidence used during an audit. These procedures can indicate possible problems with the financial records of a client, which can then be investigated more thoroughly. Analytical procedures involve comparisons of different sets of financial and operational information, to see if historical relationships are continuing forward into the period under review. In most cases, these relationships should remain consistent over time. If not, it can imply that the client’s financial records are incorrect, possibly due to errors or fraudulent reporting activity.