ISA 210.14
The auditor shall not agree to a change in the terms of the audit engagement where there is no reasonable justification for doing so.
If there is reasonable justification for changing the terms, the new terms should be agreed on and recorded.
If the auditor is not able to agree to new terms, and management refuses to let the firm continue on the basis of the old ones, the auditors should:
Withdraw, if legally entitled to
Consider if it is necessary to report the circumstances to other parties such as the shareholders or regulators
Exam focus point
Chapter Roundup
Common reasons for companies changing their auditors include audit fee, auditor not seeking re-election and change in the size of company.
ACCA's general rule on advertising is 'the medium shall not reflect adversely on the professional accountant, ACCA or the accountancy profession'.
It is generally inappropriate to advertise fees.
Professional accountants may accept or pay referral fees if appropriate safeguards exist.
When approaching a tender, it is important to consider both fees and practical issues.
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 ethical requirements in relation to the work.
The auditor must agree terms of the audit engagement with relevant personnel at the client and must ensure that preconditions for an audit exist in order to agree to those terms.
Quick Quiz
1 Name three reasons why an auditor might not seek re-election.
2 Fill in the blanks:
Advertising and promotional material should not:
– ………. the service offered ………. ……….
– Be ………., either directly or by implication
– Fall short of the requirements of the ………. ……….
………. ………. ……….
3 Why should accountants not usually advertise fees?
4 List six practical issues that an auditor should consider when approaching a tender.
5 Draw a diagram showing the key stages in a tender, explaining what happens at each stage.
6 List three sources of information about a new client given in ISQC 1.
7 According to ISQC 1, when considering whether to accept an engagement with a new or existing client, the auditors must consider whether a ………. …….. ………. arises.
8 List five matters which may be referred to in an engagement letter.
Answers to Quick Quiz
1 (1) Ethical reasons (eg fees) (2) Another client in competition (3) Disagreement over accounting policy
2 Discredit, by others, misleading, United Kingdom Advertising Standard Authority's Code of Advertising and Sales Promotion (or equivalent)
3 The advert is unlikely to be detailed, and facts given about fees could mislead potential clients.
4 (1) Does the timetable fit with current work plan?
(2) Are suitable personnel available?
(3) Where will work be performed? Is it cost effective?
(4) Are specialist skills needed?
(5) Will staff need further training?
(6) If so, what is the cost?
5 Auditor considers if it is possible to undertake work at a
reasonable fee
Arrange meeting to obtain information prior to tender Obtain knowledge of the business and the service required Allocate potential staff to work plan and calculate fee by reference to standard charge out rates
This could be in the form of:
– Letter
– Report
– Presentation
6 (1) Communications with existing/previous auditors
(2) Communications with other third parties (eg bankers / legal counsel) (3) Relevant databases
7 Conflict of interest
8 See the answer to the question in Section 5.4 in the body of the chapter.
Now try the question below from the Practice Question Bank.
Number Level Marks Time
Q7 Examination 20 36 mins
APPROACH BY CLIENT
AGREE TO TENDER
MEETING
ESTIMATE AND PLAN WORK
REQUIRED
ESTIMATE FEE
PRESENT TENDER
Audit of historical financial information
P A R T
D
Planning and risk assessment
Introduction
The issue of audit planning should not be new to you. You learnt how to plan an audit in your previous auditing studies. Why, then, is this chapter here? There are three key reasons:
To provide you with a technical update
To revise the details that should be included in an audit plan and the general considerations included in planning
To consider some of the finer points of planning from the point of view of the engagement partner, specifically to consider the issue of the risk associated with the assignment (which is a personal risk to the partner in the event of litigation arising)
Risk is an important factor in the audit. It falls into two categories:
Specific assignment risk (known as audit risk), which you have studied previously
Business risk associated with the client, which may form a part of inherent risk and therefore impacts on the audit
Risk is a key issue in an audit, and the most common approach to audits incorporates a recognition of those risks in the approach taken. This and other audit methodologies are compared in Section 2.
Topic list Syllabus reference
1 Revision: overview of audit planning D1
2 Audit methodologies D1
3 Materiality D1
4 Risk B1, D1
5 Analytical procedures D1
6 Planning an initial audit engagement D1
Study guide
Intellectual level D Audit of historical financial information
D1 Planning, materiality and assessing the risk of misstatement
(a) Define materiality and performance materiality and demonstrate how it should be applied in financial reporting and auditing.
2 (b) Identify and explain business risks for a given assignment. 3 (c) Identify and explain audit risks for a given assignment. 3 (d) Identify and explain risks of material misstatement for a given assignment. 3 (e) Discuss and demonstrate the use of analytical procedures in the planning of
an assignment.
3 (f) Explain how the result of planning procedures determines the relevant audit
strategy.
2 (g) Explain the planning procedures specific to an initial audit engagement. 2 (h) Identify additional information that may be required in order to effectively
plan an assignment.
2 (i) Recognise matters that are not relevant to the planning of an assignment. 2 B1 Code of ethics for professional accountants
(e) Discuss the importance of professional scepticism in planning and performing an audit.
2 (f) Assess whether an engagement has been planned and performed with an
attitude of professional scepticism, and evaluate the implications.
3
Exam guide
Exam case study questions are often set in the context of audit planning, identifying risk areas and considering the audit strategy to apply to the audit. This would usually come up in Section A of the exam.
1 Revision: overview of audit planning
Auditors must plan their work so that it is done effectively.
One of the competences you require to fulfil Performance Objective 17 of the PER is the ability to prepare audit programmes. You can apply the knowledge you gain from this chapter of the Study Text to help demonstrate this competence.
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