Part (a): Elements of an Engagement Letter

An engagement letter formalizes the agreement between the auditor and the client, establishing the terms and responsibilities for the engagement. The key elements include:

1. Objective of the Audit:
   • The purpose of the audit, such as expressing an opinion on the financial statements, in accordance with the applicable financial reporting framework.
2. Scope of the Audit:
   • The extent and limitations of the audit, including identification of the financial reporting framework and audit standards to be followed.
3. Responsibilities of Management:
   • A clear statement of management’s responsibilities, including preparation of financial statements, internal controls, and providing access to information and personnel.
4. Responsibilities of the Auditor:
   • Outline of the auditor’s responsibilities, including obtaining reasonable assurance about the financial statements and reporting on any misstatements.
5. Audit Fees and Billing Arrangements:
   • Agreement on the fees to be charged and the terms of payment.
6. Use of Auditor’s Report:
   • The purpose and intended users of the audit report, as well as limitations on its use by third parties.
7. Other Services:
   • Details of any additional services to be provided, such as tax or advisory services, and how they will be segregated to maintain independence.
8. Legal and Regulatory Considerations:
   • Reference to laws or regulations affecting the engagement.
9. Signatures:
   • Acceptance of terms by both the auditor and the client, formalized with signatures.

Part (b): Circumstances Under Which an Auditor May Reject an Audit Engagement

1. Independence or Ethical Issues:
   • If there are conflicts of interest or threats to independence that cannot be mitigated, the auditor should decline the engagement.
2. Inadequate Records or Non-Cooperation:
   • If the client’s accounting records are incomplete or management refuses to provide sufficient access to necessary information or explanations.
3. Doubtful Integrity of Management:
   • If management has a history of fraudulent practices or the auditor suspects they may act dishonestly.
4. Unacceptable Terms:
   • If the client imposes unreasonable restrictions on the scope of the audit or the auditor’s reporting.

Part (c): Procedures to Carry Out Before Accepting a New Client

1. Client Background Checks:
   • Investigate the client’s history, industry, reputation, and regulatory compliance to assess risk.
2. Assess Auditor Independence:
   • Evaluate any relationships with the client that might impair independence or objectivity.
3. Inquire of Predecessor Auditor:
   • Communicate with the previous auditor (with the client’s consent) to obtain information about reasons for the change, issues encountered, and integrity of management.
4. Evaluate Competence and Resources:
   • Assess whether the firm has the necessary skills, knowledge, and capacity to perform the audit effectively.
5. Understand Engagement Terms:
   • Clarify the scope, fees, timelines, and management’s responsibilities.

Part (d): Audit Procedures on Opening Balances

When auditing opening balances for a new client, the following procedures should be performed:

1. Review Previous Auditor’s Reports:
   • Obtain and review the most recent audited financial statements and reports to understand prior balances and issues raised.
2. Reperform Balances:
   • Verify the mathematical accuracy of opening balances and ensure they align with closing balances of the prior year.
3. Assess Accounting Policies:
   • Confirm that accounting policies applied to opening balances are consistent with current policies and applicable standards.
4. Inspect Supporting Documentation:
   • Examine underlying records, such as ledgers, invoices, or confirmations, to substantiate balances.
5. Perform Reconciliations:
   • Conduct reconciliations of major accounts, such as cash, receivables, payables, and inventory, to ensure their accuracy.
6. Test for Misstatements:
   • Identify potential misstatements by analyzing significant adjustments or discrepancies in opening balances.
7. Consider Legal and Regulatory Issues:
   • Ensure opening balances are free from material misstatements related to legal or regulatory non-compliance.