Overview

For this project, you will focus on performing due diligence to determine the viability of a client before deciding to engage with them. Sound client acceptance procedures can help CPA firms identify potential problem clients before formally engaging with them. In addition, for this project, you will outline the scope and objectives of an external audit and ensure you have an adequate audit team to execute the audit.

Scenario

The partner at your CPA firm has asked for your help to evaluate prospective clients that the firm is interested in auditing. Using knowledge of Generally Accepted Accounting Standards (GAAS), best practices, and risk assessment techniques, you will evaluate a client through a due diligence process and identify the objectives and scope of the audit for this client. Additionally, you will identify key risk factors that could impact the client, and you will assess your audit team to determine if they can objectively meet the needs of the audit for the client.

Directions

From the list of prospective client companies provided in the Supporting Materials section, select one company's Form 10-K to perform an analysis. You will identify any account irregularities or other risk factors (red flags) within this analysis. You will outline the specific areas to be evaluated (objectives and scope), and you will use data in the companys public statements to determine the risk factors in each evaluation area.

You will then assess your audit team by completing the Audit Team Due Diligence Professional Care Checklist Template supplied in the What to Submit section to ensure the team is qualified to perform the audit. Once your checklist is complete, you will communicate any findings within the Client Risk Profile Template. Consult the PCAOB Auditing Standards AS1005, AS1010, and AS1015 for guidance.

Finally, using the Client Engagement Letter sample found in the Supporting Materials section and the Engagement Letter Template found in the What to Submit section, you will summarize the engagement roles and responsibilities of the company youve selected to perform a 10-K analysis and create an engagement letter for that client. Consult PCAOB Auditing Standard AS16 Appendix C for guidance.

1. Apply client due diligence to determine if potential client is viable. Include the following:
   1. Client managements integrity
   2. Client managements commitment to Generally Accepted Accounting Standards (GAAS)
   3. Financial strength of the client
2. Identify risk factors for the external audit. Include the following:
   1. External factors
   2. Other factors
3. Identify the objectives and scope of the external audit. Include the following:
   1. Associated deliverables
   2. Data type to be investigated
   3. Tests to be performed
4. Assess due professional care of the proposed audit team. Include the following:
   1. Technical competency
   2. Independence (lack of bias)
   3. Professional skepticism
5. Summarize the engagement roles and responsibilities of the external audit. Include the following:
   1. Scope of audit
   2. Auditor responsibilities
   3. Client responsibilities
   4. Cost of auditing services
   5. Timeline for auditing services

Additional Information

Fees and schedule The audit will be based on a time and materials basis with a not to exceed amount of $750,000. Additionally, we will bill all out-of-pocket expenses at cost. The rates for our staff are as follows:

• Partner $400/hour
• Manager $300/hour
• Senior Auditor $200/hour
• Staff Auditor $150/hour

The anticipated start date of the engagement is January 2, 20xx with an estimated completion date of February 28, 20xx.

[Date]

[New Client]

RE: Employment of ______________________ by _____________________

Dear ____________________________:

Thank you for selecting _____________________________ to represent you with respect to ________________________________________________. This letter will confirm our recent discussion regarding the scope and terms of this engagement.

Our firm has agreed to represent you for this engagement. I personally will supervise the case. However, it is anticipated other representatives in the firm also will work on the engagement.

[Add some details here of the anticipated services and discuss any limitation on the scope of the representation.]

[Straight hourly option, add if applicable or remove if not applicable] You have agreed to pay for our services based on the time we spend working on the engagement. My current hourly rate is $_____ per hour. The rates of our associates currently range between $ ______and $ ______ per hour. Accounting Assistants, who will be utilized where appropriate to avoid unnecessary accountant fees, currently are charged at $ _____. These rates are subject to change once a year, usually in December. Generally, you will be billed for all time spent on your engagement, including telephone calls.

[Value added billing option, add if applicable or remove if not applicable] You have agreed to pay for our services based on the time we spend working on the engagement, with allowance for reduction or increase in fees under certain circumstances. My current hourly rate is $_____ per hour. The rates of our associates currently range between $ ______and $ ______ per hour. Accounting Assistants, who will be utilized where appropriate to avoid unnecessary accountant fees, currently are charged at $ _____. These rates are subject to change once a year, usually in December. On occasion, time may be written off before a statement is sent because we feel there has been some degree of inefficiency in the work, or for other reasons. On the other hand, fees may be raised above hourly rate levels, based on the complexity of the matter, superior results, or other factors. If applied, we will discuss any such increases with you and believe that you will find them appropriate.

We will forward billing statements monthly. They will contain a description of services, including the date, the person rendering the service, the amount of time involved, and a description of the task accomplished. Monthly statements also will itemize monies we have advanced on your behalf, such as service and filing fees, expert witness fees, court reporter fees, and charges for investigation, travel and accommodations, telephone long distance, photocopies, and telecopies.

As discussed, our current estimate for this engagement is $ ________. [Detail items the estimate covers and does not cover.] This estimate is imprecise as my knowledge of the facts currently is limited. We will advise you if fees will be significantly higher than this estimate. At such a time, you may decide to restrict the scope of our efforts, or we may make other adjustments. This estimate does not include cost items.

You have paid the sum of $ _______ as an advance against fees and costs, which we have deposited to our trust account. After your receipt of monthly statements, we will pay the amount of the statement from the trust account. If any portion of the advance is unexpended at the conclusion of the engagement, it will be refunded to you. If the advance is expended, you have agreed to pay subsequent monthly installments upon receipt. An interest charge of one and one-half percent per month is charged on statement balances not paid within 30 days of billing.

You will appreciate we can make no guarantees of a successful conclusion in an engagement. However, the accountants at this firm will use their best efforts on your behalf.

[Include any special disclosures that may be appropriate, such as potential conflicts of interest, client confidentiality issues, etc.]

My objectives are to provide you with excellent auditing services and to protect your interests in the event of my unexpected death, disability, impairment, or incapacity. To accomplish this, I have arranged with another accountant to assist with closing my practice and my office staff or assisting accountant will contact you and provide you with information about how to proceed.

If this letter fairly states our agreement, will you please so indicate by signing and returning the enclosed copy in the enclosed business reply envelope. If you have any questions or concerns, please call me to discuss them. We greatly appreciate the opportunity to represent you for this engagement and look forward to working with you.

Sincerely,

Accountant Name

Firm Name