Accepting engagements
Let’s talk about THE ADVANCED AUDIT & ASSURANCE EXAM
Factors to consider when accepting new client/client continuation
1. Resources ( staff, time, competence of the firm including knowledge and experience of relevant industry, regulatory and reporting requirements, Scale of engagement-global?)
2. Commercial considerations ( level of fee, profitability of the engagement etc) 3. Know Your Client/ Customer Due diligence
4. Risk (management integrity, money laundering, listed company, weak internal control etc)
How to assess risk at this stage? Credit reference agencies, recently published F/S (solvency, adequacy of disclosures, appropriate accounting policies), contacts, newspapers, internet, company search( annual returns filed, SH details, PEP-politically exposed persons?)
5. Professional liability implication (e.g. audit required by lender) 6. Miscellaneous (complaints procedure, regulation by profession) 7. Independence, conflict of interest
8. Professional etiquette letter ( clearance from outgoing auditor) 9. Pre- conditions of an audit
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ISQC 1 sets out what a firm must consider and document in relation to accepting or continuing an engagement, which is the integrity of the client, whether the firm is competent to do the work and whether the firm meets the ethical requirements in relation to the work.
Ethical
considerations
Procedures before accepting nomination
(a) Ensure that there are no ethical issues which are a barrier to accepting nomination ( including any conflicts of interest)
(b) Ensure that the auditor is professionally qualified to act and that there are no legal or technical barriers
(c) Ensure that the existing resources are adequate in terms of staff, expertise and time (d) Obtain references for the directors if they are not known personally to the audit firm
(e) Consult the previous auditors to ensure that there are not any reasons behind the vacancy which the new auditors ought to know. This is also a courtesy to the previous auditors Competence of the firm
Do firm personnel have knowledge of relevant industries/subject matters?
Do firm personnel have experience with relevant regulatory or reporting requirements, or the ability to gain the necessary skills and knowledge effectively?
Does the firm have sufficient personnel with the necessary capabilities and competence?
Are experts available, if needed?
Are individuals meeting the criteria and eligibility requirements to perform the engagement quality control review available where applicable?
Is the firm able to complete the engagement within the reporting deadline Work
considerations
Setting fees
Once the total time and staff required for the assignment is ascertained, it should be easy for the auditor to determine the approximate fees that need to be charged. However, fees will not only be based on the time and staff required, but also on the following:
– Importance of the work to the client – Urgency of the work
– Complexity (which relates to time) – Need for travel (for e.g. to branch offices) Legal
considerations
a) Eligibility of an auditor
b) Restriction on the number of audits: In some jurisdictions (such as in India), there is a maximum limit to the number of audits that can be accepted by a member or audit partner.
Other
considerations
a) What is the level at which fees are generally charged for the work concerned? For example, the fees that are charged by other auditors can be determined from the annual reports of public companies.
b) Would it be advantageous to the auditor to accept the assignment? For example, obtaining professional work from a particular client may enhance the auditor’s image.
c) At what level of fees was the tender accepted last year?
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Preconditions for an Audit
1. Determine whether the financial reporting framework to be applied in the preparation of the financial statements is acceptable
2. Obtain the agreement of management that it acknowledges and understands its responsibility:
(i) For the preparation of the financial statements in accordance with the applicable financial reporting framework, including where relevant their fair presentation
(ii) For such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; and
(iii) To provide the auditor with:
a. Access to all information of which management is aware that is relevant to the preparation of the financial statements such as records, documentation and other matters;
b. Additional information that the auditor may request from management for the purpose of the audit***;
and
c. Unrestricted access to persons within the entity from whom the auditor determines it necessary to obtain audit evidence
***Additional information: Additional information that the auditor may request from management for the purpose of the audit may include when applicable, matters related to other information in accordance with ISA 720 (Revised).
When the auditor expects to obtain other information after the date of the auditor’s report, the terms of the audit engagement may also acknowledge the auditor’s responsibilities relating to such other information including, if applicable, the actions that may be appropriate or necessary if the auditor concludes that a material misstatement of the other information exists in other information obtained after the date of the auditor’s report
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Agreeing the terms of the engagement
Once the accountant agrees to work for a client, he must decide the terms of engagement in writing with the client. Such written communication is known as an ‘engagement letter’. ISA 210 Agreeing the Terms of Audit Engagements provides guidance on agreeing terms with a client and changes in the engagement terms. It assists the accountants in preparing audit engagement letters for accepting audit assignments, tax, accounting, or management advisory services.
Generally, an audit engagement letter includes the following matters:
1. Objective of the audit: e.g. statutory audit or internal audit
2. Scope of the audit: Elaboration of the scope of the audit, including reference to applicable legislation, regulations, ISAs, and ethical and other pronouncements of professional bodies to which the auditor adheres.
3. Identification of the applicable financial reporting framework: e.g. IFRS or US GAAP 4. Time schedule: estimated time required for completion of audit
5. The requirement for the auditor to communicate key audit matters in the auditor’s report in accordance with ISA 701 6. Deliverables: The form of any other communication of results of the audit engagement.e.g. letters, certificates or
audit report.
7. The expectation that management will provide written representations 8. The basis on which fees are computed and any billing arrangements.
9. Permission to communicate with the previous accountant (by sending the etiquette letter)
10. Access to all the records, documentation and other information requested in connection with the audit, e.g. customs documents to verify whether the goods are being held by customs
11. Management’s responsibility for establishing and maintaining effective internal controls, e.g. maintenance of proper accounting records
12. The fact that because of the inherent limitations of an audit, together with the inherent limitations of internal control, there is an unavoidable risk that some material misstatements may not be detected, even though the audit is properly planned and performed in accordance with ISAs.
13. Arrangements regarding the planning and performance of the audit, including the composition of the engagement team.
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14. The expectation that management will provide access to all information of which management is aware that is relevant to the preparation of the financial statements, including an expectation that management will provide access to information relevant to disclosures.
15. The agreement of management to make available to the auditor draft financial statements including all information relevant to their preparation, whether obtained from within or outside of the general and subsidiary ledgers (including all information relevant to the preparation of disclosures), and the other information,3 if any, in time to allow the auditor to complete the audit in accordance with the proposed timetable.
16. The agreement of management to inform the auditor of facts that may affect the financial statements, of which management may become aware during the period from the date of the auditor’s report to the date the financial statements are issued.
17. A request for management to acknowledge receipt of the audit engagement letter and to agree to the terms of the engagement outlined therein.
Where the auditor is replacing an existing auditor while accepting a new client, he should contact the existing auditor and communicate his intentions for taking up the work of that client.
This must be done after taking prior permission from the client. Such communication usually takes place in the form of an etiquette letter or professional enquiry letter. If the client does not give permission to approach the outgoing auditor, the auditor should refuse the engagement.
An etiquette letter / professional enquiry letter enables the new auditor to communicate with the existing auditor and know if there are any areas of concern which he must consider before accepting the new engagement.
Many times, the apparent reason for a change of auditors may not fully reflect the facts and may indicate disagreements with the existing accountant that may influence the decision to accept the appointment.
Audit of the components in a group: If the client entity comprises various subsidiaries, divisions, units or branches, the auditor should consider sending separate engagement letters to each such subsidiary, division, unit or branch, if he is appointed as the auditor for the entire group. This is because the terms of the audit’s legal requirements for appointment of auditors of different business units (i.e. subsidiaries, divisions etc.) may be different and may not apply to the group as a whole.
It also depends upon factors such as the extent of independence of the components in a group and the degree of ownership by the parent company.
Recurring audits: In recurring audits, the auditor should consider whether circumstances require the terms of the engagement to be revised and whether there is a need to remind the client of the existing terms of the engagement.
Acceptance of a change in engagement: An auditor who, before the completion of the engagement, is requested to change the engagement to one which provides a lower level of assurance, should consider the appropriateness of doing so.
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A request from the client for the auditor to change the engagement may come as a result of various reasons, these are as follows:
– A change in circumstances which affect the need for the service. E.g. a listed company may decide not to purchase a subsidiary so therefore may not require due diligence already agreed and therefore would want the auditors to discontinue the engagement.
– A misunderstanding in relation to the nature of an audit or a related service that was originally requested.
E.g. if an auditor, who is appointed to audit the accounts of a client is held responsible by the management for not detecting a fraud in addition to performing the audit, then the management is said to have misunderstood the nature of a regular audit. If detection of fraud is the primary concern of the client, the client should hire the investigative assurance services of another auditor.
– A restriction on the scope of the engagement, whether imposed by the management or caused by circumstances. E.g.
verification of physical records made difficult due to a factory closure during a workers’ long term strike.
The auditor should carefully consider the implications of a restriction on the scope of the engagement. For example, the auditor must evaluate the consequences of not being able to conduct the physical verification of records due to the strike on the audit opinion.
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The Planning stage of audit
Planning Summary
Audit strategy:
a) Understanding the business b) Risk assessment
c) Materiality d) Scope, Timing, Direction
to ensure adequate resources are allocated to the audit.
Audit Plan :
detailed instruction on how to audit (audit programmes). This includes descriptions of risk assessment procedures and further planned audit procedures.
Audit Strategy ( approach/ initial client evaluation) a) Understanding the client
- Industry, regulatory and other external factors( for example financial reporting framework, laws and regulations, stakeholders, economic conditions like volatility of exchange rates, competition, level of technology
- Nature of entity and accounting policies ( legal structure, ownership and governance, main sources of finance)
- Objectives…strategies…related business risks!
- Measurement and review of Financial performance ( measures important to the client, KPIs, budgets, targets)
- Internal control (gain an understanding about the design and implementation of internal controls) This understanding is gained through Inquiry ( from management, IA, TCWG, legal advisor). Observation, Inspection(interim F/S, policy manuals, brochures, minutes, business plans, website), Analytical Procedures
b) Risk Assessment i)Assess risk (ISA 315) This is done through understanding the client, Analytical procedures(evaluate plausible relationships between financial and non-financial data), Team discussions
ii)Response (ISA 320) - Professional
skepticism - More skilled staff - Consultations - Unpredictable
testing