Who shall initiate the communication between a successor and predecessor auditor in case there is change in the auditor of a company?

Answer: There are a number of reasons an auditor may choose not to continue a relationship with an existing client. Examples include:

1. Previous conflicts over accounting issues, scope of the audit, type of opinion, or fees.
2. Management integrity may be deemed to be insufficient.
3. Legal action initiated by either the auditor or client related to prior audit services.
4. If fees remain unpaid for services performed more than one year prior to the date of the current year's audit report.
5. The presence of excessive risk which could result in financial failure of the client or lawsuits against the audit firm.

SAS No. 17 Communication between Successor and Predecessor Auditors

Status

Issued by Auditing Standards Committee in Taiwan on 1 May, 1989.

Summary

The initiative for communicating rests with the successor auditor. The communication may be either written or oral. Both the predecessor and successor auditors should hold in confidence information obtained from each other. This obligation applies whether or not the successor auditor accepts the engagement.

The successor auditor should request permission from the prospective client to make an inquiry of the predecessor auditor prior to final acceptance of the engagement. The successor auditor should ask the prospective client to authorize the predecessor auditor to respond fully to the successor auditor's inquiries. If a prospective client refuses to permit the predecessor auditor to respond or limits the response, the successor auditor should inquire as to the reasons and consider the implications of that refusal in deciding whether to accept the engagement.

The successor auditor should make specific and reasonable inquiries of the predecessor auditor regarding matters that will assist the successor auditor in determining whether to accept the engagement. Matters subject to inquiry should include—

• Information that might bear on the integrity of management.
• Disagreements with management as to accounting principles, auditing procedures, or other similarly significant matters.
• The predecessor auditor's understanding as to the reasons for the change of auditors.

The predecessor auditor should respond promptly and fully, on the basis of known facts, to the successor auditor's reasonable inquiries. However, should the predecessor auditor decide, due to unusual circumstances such as impending, threatened, or potential litigation; disciplinary proceedings; or other unusual circumstances, not to respond fully to the inquiries, the predecessor auditor should clearly state that the response is limited. If the successor auditor receives a limited response, its implications should be considered in deciding whether to accept the engagement.

The successor auditor should request that the client authorize the predecessor auditor to allow a review of the predecessor auditor's working papers. The predecessor auditor should determine which working papers are to be made available for review and which may be copied, such as the working paper analysis of balance sheet accounts, and those relating to contingencies.

Effective date

This Statement is effective for audit of financial statements where the successor auditor is engaged on or after 1 July, 1989.

Chapter 8

Multiple-Choice Questions

1.

easy

Which of the following is not one of the three main reasons why the auditor should properly

plan engagements?

aa.To enable proper on-the-job training of employees.

b.To enable the auditor to obtain sufficient appropriate evidence.

c.To avoid misunderstandings with the client.

d. To help keep audit costs reasonable.

2.Avoiding misunderstandings with the client is important for:

easy

aGood client relationsFacilitating high-quality work at a reasonable cost

a.

b.

c.

d.

Yes

No

Yes

No

Yes

No

No

Yes

3.

easy

A measure of how willing the auditor is to accept that the financial statements may be materially

misstated after the audit is completed and an unqualified opinion has been issued is the:

ba.inherent risk.

b.acceptable audit risk.

c.statistical risk.

d.financial risk.

4.

easy

A measure of the auditor’s assessment of the likelihood that there are material misstatements in

an account before considering the effectiveness of the client’s internal control is called:

da.control risk.

b.acceptable audit risk.

c.statistical risk.

d.inherent risk.

5.When inherent risk is high, there will need to be:

Easy

dA lower assessment of audit riskMore evidence accumulated by the auditor

a.

b.

c.

d.

Yes

No

Yes

No

Yes

No

No

Yes

6.The auditor is likely to accumulate more evidence when the audit is for a company:

easy

aWhich has large amounts of debtWhich is to be sold in the near future

a.

b.

c.

d.

Yes

No

Yes

No

Yes

No

No

Yes

7.Which of the following is not typically included in initial audit planning?

easy a.Client acceptance/continuation decisions.

db.Determination of the purpose of the audit.

c.Obtain an understanding with the client.

d.Perform analytical procedures as substantive tests.

Arens/Elder/Beasley

Who is responsible for initiating the communication between the predecessor and successor auditors?

What is the responsibility of a successor auditor to communicate with the predecessor auditor?

When should a successor auditor communicate with a predecessor auditor?

What inquiries should the successor auditor make of the predecessor auditor?