Question

You are a member of the audit team that is meeting with the client and have been tasked to prepare responses to the following:

a. What is the objective of the audit of financial statements and how do auditors meet that objective? (5 Marks)
b. Distinguish between management’s and auditor’s responsibility for the financial statements being audited? (5 Marks)
c. What are the responsibilities of the successor and predecessor auditors when a company is changing auditors? (5 Marks)
d. What factors should an auditor consider prior to accepting an engagement? Explain. (5 Marks)
e. What is the purpose of an engagement letter? What subjects should be covered in such a letter? (5 Marks)

Answer 1

The objective of an audit is to ensure financial statements are free of material misstatement. Management is responsible for the financial statements, while auditors provide an opinion based on their audit. Responsibilities during an auditor change, factors for engagement consideration, and the purpose of an engagement letter are key elements in the auditing process.

Step-by-step explanation:

Audit Objectives and Auditor Responsibilities

The objective of the audit of financial statements is to provide reasonable assurance that the financial statements are free of material misstatement, whether due to fraud or error. Auditors meet this objective by performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements.

Difference Between Management and Auditors Responsibilities

Management is responsible for the preparation and fair presentation of the financial statements in accordance with applicable financial reporting frameworks, including the design, implementation, and maintenance of internal control relevant to the preparation of financial statements that are free from material misstatement. The auditor's responsibility is to express an opinion on these financial statements based on the audit.

Successor and Predecessor Auditor Responsibilities

Successor and predecessor auditors have specific responsibilities when a company changes auditors. The predecessor auditor may be asked to provide the successor with access to their audit documentation and to discuss their findings. The successor should perform their due diligence on the engagement, which includes obtaining and reviewing certain types of information from the predecessor auditor.

Factors for Auditor's Engagement Consideration

Prior to accepting an engagement, an auditor should consider factors such as the client's integrity, the auditor's ability to meet the reporting deadlines, conflicts of interest, and the auditor's own independence.

Purpose and Contents of an Engagement Letter

An engagement letter serves as a formal agreement between the auditor and client regarding the scope and objectives of the audit, responsibilities of the auditor and the client, limitation of the engagement, the fees, and any other necessary terms of the engagement.