## Preliminary Engagement Activities

These are the first element of the planning process and must be completed before the substantive planning activities begin.

### Three Key Preliminary Engagement Activities

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#### 1. Procedures Regarding Continuance of Client Relationship

The auditor must ensure that:

Appropriate procedures for acceptance and continuance of client relationships have been followed
Conclusions reached in this regard are appropriate

> Think of this as a gateway check: Should we take on / continue this engagement?

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#### 2. Evaluating Compliance with Ethical Requirements (Including Independence)

The engagement partner must form a conclusion on compliance with independence requirements. Specifically:

Step	Action
(i)	Obtain relevant information from the firm to identify and evaluate circumstances and relationships that create threats to independence
(ii)	Evaluate information on identified breaches, if any, of the firm's independence policies and procedures
(iii)	Take appropriate action to eliminate threats or reduce them to an acceptable level by applying safeguards; or withdraw from the engagement if required

> If the engagement partner cannot resolve the matter, they must promptly report to the firm for appropriate action.

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#### 3. Establishing an Understanding of Terms of Engagement

Performing preliminary engagement activities assists the auditor in identifying and evaluating:

Events or circumstances that may affect the auditor's ability to plan and perform the audit engagement

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### Why These Activities Matter

Completing these three activities early ensures the auditor does not invest significant effort in planning an engagement that should not have been accepted in the first place, or where independence has already been compromised.

Worked example

### Example 1

Example — Independence Threat:

CA Firm PQR & Co. is planning to continue the audit of MNO Ltd. During preliminary activities, the engagement partner discovers that a new firm partner has invested ₹5 lakhs in MNO Ltd's shares. This is a self-interest threat to independence. Step (iii) requires the firm to either: (a) require the partner to divest the shares (safeguard), or (b) withdraw the partner from the engagement, or (c) in extreme cases, withdraw from the audit entirely.

### Example 2

Example — Client Continuance:

During continuance procedures for PQR Ltd, the auditor finds that management refused to provide explanations for significant journal entries in the prior year and there are unresolved disagreements about accounting policies. These are red flags that must be evaluated before deciding to continue the engagement.

⚠️ Common exam mistakes

Assuming independence evaluation is only done once at the start of the firm relationship — it must be evaluated fresh for each engagement.
Confusing preliminary engagement activities (gateway checks) with planning activities (strategy and plan) — they occur in sequence, not simultaneously.
Thinking only the audit team members need to be checked for independence; the check extends to the entire firm's relationships with the client.

Reference: SA 300, Preliminary Engagement Activities — SA 300 — Planning an Audit of Financial Statements (ICAI)

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Preliminary Engagement Activities — Client Continuance, Independence, Engagement Terms

Worked example

⚠️ Common exam mistakes