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The essential step needs to be considered when evaluating the auditor - client relationship.

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Question:- At the completion of any assurance engagement, it's essential that the auditor evaluate whether it is appropriate and prudent for the auditor to continue providing assurance services to the client. Explain why this is essential step and outline the factors which need to be considered when evaluating the auditor / client relationship.

Answer:- According to AS2101, auditor is responsible to plan audit which include establishment of overall audit strategy for preparing and developing audit plan. The planning involves risk assessment procedures and responses to be made to the risks in relation to material misstatement. During the early years of audit the services of auditor may get impaired due to less knowledge on business operations, controls, systems and accounting policies. Auditor also does not carry a knowledge on pattern of industries. Thus, audit planning will help auditor to prevent any wrong reporting. Auditor should perform the following activities before engagement activities. 

Auditor should perform a procedure to maintain a healthy relationship with client, determine ethical compliance and must also be revaluated with circumstances changes. A proper understanding should also be made from audit committee about the terms and conditions of audit as per AS 1301, communications with audit committee. There is need to prepare proper audit strategy which can set out time, scope and direction and give directions on audit planning. Auditor should report the purpose of engagement and medium with nature of communication as required by PCAOB standards, factors relevant for giving directions to the engagement team, results of preliminary engagement activities, nature, timing, and resources for performing engagement process. 

Auditor should give a thorough examination of the prospective client on the financial stability, business continuity, and management integrity, relationship of Company with attorneys, bankers and any previous audit or CPA firm. Furthermore auditor should also evaluate the size of firm, applicable laws, internal control effectiveness, which can impact the program of audit. Auditor should also be aware of the matters which can affect industry in which Company is operating such as condition of economy, changes in technology, laws and regulations. Auditor should also know the capital structure and operating characteristics of client. The awareness of any changes happened with client should also be there whether in operations, internal control or company. Auditor should also be conduct a preliminary judgement on risk, materiality and other factors in relation to material weakness. 

In case of audit of multiple location of business then auditor need to ascertain the material misstatement in the consolidated financial statements as related to location of business and which include degree of centralization of information processing and maintenance of records, important transactions which are outside the normal business, identification of specific risks in association with the location of business, time, frequency and scope of monitoring activities and effectiveness of control environment. 

While determining the location of business while performing audit procedures, auditor should find out relevant activities taken into account by internal auditor as prescribed under AS2605. Considerations can be also be made on internal audit functions as under AS 2201, 2605 mentioning the requirements derived on the basis of internal audit and others.

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