A preliminary review is important as it helps the audit firm to screen out potentially risky audit clients and also identify any factors that could affect the nature of the work to be performed and also the approach to be adopted by the auditor.
The considerations which are relevant in deciding whether a client is a high risk include:-
– evidence of client engagement in fraudulent or illegal activities
– the state of the economic sector in which the client operates (a depressed sector may indicate risk)
– the nature of the industry and the clients product lines
– the clients previous audit history (frequent changes of auditors, and/or qualified reports are indicators of high risk clients)
– The general abilities of the client management
– Understanding of the directors of their own role and that of the auditor
– Evidence of management intentionally failing to record a material transaction.
You have received a request form XYZ Ltd. to accept an appointment as their auditor for the financial year ending 31 December 2001. Required: What is the importance of a preliminary review?
