3: Accepting and managing engagements

Question 1

4 steps are set out by the ICAEW code of ethics in relation to changes in a professional appointment

Answer 1

1. When the prospective auditor is first approached, he should explain his professional duty to communicate with the existing auditor
2. Client gives written authority to communicate. If the client does not allow it, the existing should tell this to the prospective
3. Prospective writes to the existing seeking information for whether he should accept the appointment. If no response, prospective writes by recorded delivery expressing intent to accept, no response implies o adverse comments
4. Existing should communicate to prospective

Question 2

How are auditors appointed

Answer 2

by members at AGM via ordinary resolution within 28 days of the final in which the accounts must be filed.

The exception is where the directors appoint, either to fill a casual vacancy or to appoint the first auditor between the date of incorporation and the first AGM (although the members must reappoint in AGM)

In rare circumstances, the secretary of state may appoint if it has not been done in time

Question 3

What is the right of auditors upon removal

Answer 3

Written representation to explain the disagreement

Question 4

Rules around removal/resignation of auditor

Answer 4

Possible at any time if shareholders pass an ordinary resolution

Notice must be given

IF RESIGNATION: prepare resignation letter and contact audit authority (rest the same)

Auditor must:
Deposit statement of circumstances explaining removal (if listed must explain, if not can say”there are no circumstances”)

Return books and records

Maintain confidentiality and cooperating with the new auditor

Auditor has the right to write to shareholders ahead of AGM and attend the GM

Question 5

5 things an engagement letter should cover

Answer 5

Objectives and scope

Managements’ responsibilities

Form of reports

Explanation of limitations

Explanation of unrestricted access

Question 6

4 factors that may indicate when a new engagement letter is required

Answer 6

If the client misunderstands the terms of engagement

Revised or special terms

A recent change of senior management

Change in ownership, nature, or size of the company

Question 7

6 issues to consider in the engagement letter for examining prospective financial information eg reviewing cash flow forecast

Answer 7

Intended use of information

Whether it will be for general or limited distribution

Assumptions

Elements

Period covered

Caveat warning that there could be differences between forecast and actual