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Preconditions for an audit

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AA Exams › Preconditions for an audit

  • This topic has 7 replies, 2 voices, and was last updated 2 years ago by Kim Smith.
Viewing 8 posts - 1 through 8 (of 8 total)
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    Posts
  • January 8, 2023 at 1:19 pm #675492
    alawi sayed
    Participant
    • Topics: 301
    • Replies: 352
    • ☆☆☆☆

    Hello Sir :

    The following are the preconditions for an audit:

    The preconditions for an audit are that management acknowledges and
    understands its responsibility for:
    ?
    Preparation of the financial statements in accordance with the applicable
    financial reporting framework.
    ?
    Internal control necessary for the financial statements to give a true and
    fair view.
    ?
    Providing the auditor with access to all relevant information and
    explanations.

    but in OT notes we have some thing says:
    Before you say yes to to an audit.

    Sir can you clarify about the distinctions between the two because they seem like they overlap ping.

    Thanks,

    January 8, 2023 at 2:20 pm #675495
    Kim Smith
    Keymaster
    • Topics: 134
    • Replies: 8304
    • ☆☆☆☆☆

    I don’t have notes to hand but, in short, there’s more to “saying yes” than meeting the preconditions. The preconditions are about making sure that management understands its responsibilities for the financial statements and will cooperate with the auditor. The auditor will have other things to consider, like ethical/independence issues and practical issues such as timing of resources.

    January 8, 2023 at 6:00 pm #675514
    alawi sayed
    Participant
    • Topics: 301
    • Replies: 352
    • ☆☆☆☆

    Thanks

    I am trying to add something but the page is not accepting but you can refer to the notes page no 46 SEP 21 to JUN 22 notes.

    Thanks

    January 11, 2023 at 8:48 am #675607
    Kim Smith
    Keymaster
    • Topics: 134
    • Replies: 8304
    • ☆☆☆☆☆

    My original answer stands – “preconditions” are a professional requirement of ISA 210, but there are other considerations – ethical, practical, etc.

    January 11, 2023 at 9:48 pm #675513
    alawi sayed
    Participant
    • Topics: 301
    • Replies: 352
    • ☆☆☆☆

    Thanks Sir,

    In the notes there some conditions that the auditor should consider before saying yes :

    2. The appointment process: before you say ‘Yes’…
    Auditors must exercise great caution if asked to be the auditors of an organisation.
    ?
    Are they professionally qualified to act? Is it legal and ethical for them to do so? For example,
    they shouldn’t accept an appointment if the fees exceed the 15% limit for public interest
    companies, unless there are adequate safeguards.
    ?
    Do they have adequate resources in terms of staff, time, and expertise? If the potential audit
    client acts in a specialist area of business and the auditors have no prior experience of that, it
    would be very unwise for them to accept the appointment.
    ?
    Investigate the client, its management, and directors. Many firms of auditors have access to
    databases which, for example, will allow them to search on directors’ names to see if any of the
    directors have been banned from being directors of companies because of their past behaviour.
    They may discover that it is too risky to become the auditor of a company if they have no trust in
    the honesty of the directors. The audit fee is often modest, why risk your reputation by
    undertaking an audit where the directors may be fraudulent?
    ?
    Communicate with present auditors. There is a professional requirement to do this and it is
    essential to find out why the old auditors are retiring or being removed.

    These what I am thinking of.

    Thanks,

    January 12, 2023 at 8:13 am #675747
    Kim Smith
    Keymaster
    • Topics: 134
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    • ☆☆☆☆☆

    Sorry, but I don’t understand what it is that you don’t understand (!)

    The preconditions are a requirement of ISA 210:

    4. For purposes of the ISAs, the following term has the meaning attributed below:
    Preconditions for an audit – The use by management of an acceptable
    financial reporting framework in the preparation of the financial statements
    and the agreement of management and, where appropriate, those charged with
    governance to the premise2 on which an audit is conducted.

    Preconditions for an Audit
    6. 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 (Ref: Para.
    A2–A10)
    (b) Obtain the agreement of management that it acknowledges and
    understands its responsibility: (Ref: Para. A11–A14, A21)
    (i) For the preparation of the financial statements in accordance with
    the applicable financial reporting framework, including where
    relevant their fair presentation; (Ref: Para. A15)
    (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 (Ref:
    Para. A16–A19)
    (iii) To provide the auditor with:
    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.

    But satisfying the preconditions is only ONE aspect of “agreeing the terms of audit engagements” – before agreeing the terms, does the auditor even want to have this entity as an audit client? Or be associated with its directors? Or what the business does? Can the auditor – ETHICALLY – accept a nomination? Etc, etc, etc

    January 17, 2023 at 8:05 pm #676788
    alawi sayed
    Participant
    • Topics: 301
    • Replies: 352
    • ☆☆☆☆

    Thank you for clarification.

    January 18, 2023 at 6:28 am #676823
    Kim Smith
    Keymaster
    • Topics: 134
    • Replies: 8304
    • ☆☆☆☆☆

    You’re welcome!

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