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The procedures that Morgan should apply in deciding whether to accept this prospective audit client would ordinarily include the following:
[1] Evaluate the CPA firm's independence with respect to the prospective audit client.
[2] Explain to the prospective client the need to make inquiries of the predecessor auditor, requesting that the client authorize the predecessor auditor to respond fully and to allow a review of the
predecessor's audit working papers.
[3] Make inquiries of the predecessor auditor concerning such matters as the integrity of management, any disagreements with management as to accounting principles, the reason for the change in auditors, and any other matters affecting the decision of whether to accept the engagement.
[4] Make inquiries of other appropriate third parties regarding the history of the prospective client and the reputations of its management and directors. These third
parties may include the client's bankers, legal counsel, and underwriters.
[5] Obtain a knowledge of the client's business activities and business environment. Sources of this information include inquiries of management and others within the organization, inspection of internal documents and records, the client's website, AICPA accounting and audit guides, registration statements and Form 10-Ks filed with the SEC, interim financial statements, income tax returns, and credit reports.
[6]
Consider any special problems or unique risks likely to be associated with the engagement.
[7] Hold preliminary meetings with management and the audit committee to discuss such matters as the scope of the services to be performed, timing of the performance and completion of the audit, basis for the fee, and work that may be done by the client's staff in preparation for the audit.
Upon acceptance of the engagement, Morgan should issue an engagement letter summarizing the arrangements
reached with the client.
[1] The nature of the client, including the client's application of accounting policies—The auditors' understanding of this area will include the client's competitive position, organizational structure, accounting policies and procedures, ownership, capital structure, and product lines. The understanding will also encompass an understanding of the client's business model and its major business processes.
[2] The industry,
regulatory, and other external factors—The factors included here are industry conditions, such as the competitive environment, supplier and customer relationships, and technological developments. They also include the regulatory, legal, and political environment, and general economic conditions.
[3] Objectives and strategies and related business risks—The auditors obtain an understanding of the operating and financing strategies of management. They also obtain an understanding of management's
risk assessment process. This assists the auditors in identifying significant business risks that may create risks of material misstatement of the financial statements.
[4] Methods of measuring and reviewing performance—The auditors obtain an understanding of the methods management uses to measure and review performance at various levels within the organization. These methods are important to determining incentives of management and other employees. The measures may also be used in designing
effective analytical procedures.
[5] Internal control—The auditors' understanding of internal control assists them in planning the audit and assessing control risk.