AA Flashcards
Tendering for audits.(3)
The most common method of obtaining an audit is by tender, when the audit firm bids against other firms in order to win the contract to carry out the work.
During the tender, the firm will set out the reasons why the client – who may be either new or existing – should choose them to carry out the audit.
Possible reasons for the client accepting the firm’s tender include:
the perceived value for money of the audit fee the firm propose
the firm’s quality of service
the firm’s knowledge of the client’s business and industry
the personnel that the firm proposes.
5 factors important for fee deciding.(5)
-personnel eg level/experience/number
-time e.g. physical time charged
-risk and responsibility eg how important or risky
-nature of clients business (the more complex the more time will be required)
-expenses for travel to client will be recharged.
Which of the following threats to objectivity may arise if an audit firm quotes a very low fee for a new audit engagement?
When a low fee is charged, self-interest may tempt an audit firm to spend as little time as possible on the work. This would mean the firm may not be able to complete the audit to an acceptable standard in a commercial way.
Care should be taken when a low fee is charged. Appropriate safeguards might include an independent quality control review to ensure an acceptable quality of work.
ISA 220 and ISQC 1
The ISA 220 and ISQC 1 standards require certain types of information to be considered by the auditor when deciding whether to continue an existing engagement or accept a new engagement.
Before accepting an engagement, auditors must consider:
a risk analysis
whether there are any ethical barriers to acceptance
whether the firm has adequate resources to carry out the work
any legal issues
Companies Act 2006 legal rules for auditor appointment.(
-Director appointment is is only allowed to fill a casual vacancy (e.g. if an auditor retired during the year) or for the very first appointment of auditors.
-Shareholders appoint an auditor by passing an ordinary resolution at a general meeting (happens when >50% votes are cast). The appointment must be made within 28 days after the latest date for filing the financial statements or the existing auditor is deemed to be reappointed.
-Secretary of state appointment which would only occur in rare circumstances where no auditor has been appointed by the relevant time.
Objectives in risk assessment process.(5)
-governance and leadership
-relevant ethical requirements
-acceptance and continuance
-engagement performance
-Resources
-information and communication.
What is required by ISA 220/ISQM 1?
Requires that external auditors investigate prospective clients for integrity.
Reasons why it is important to assess a prospective clients integrity.(8)
-Required by ISA 220& Reduces engagement risk
May indicate:
aggressive accounting treatment
intimidation threat
criminal activity eg money laundering
weak control environment
an inability to obtain appropriate and sufficient evidence
-unreliable management representations
Therefore, vetting clients ultimately reduces risk of:
-investigation from regulatory bodies
-damage to firm reputation
-claim for damages
-inappropriate opinion!
Would by a SFQ therefore 4 marks at 0.5 marks per point above^^.
Engagement performance.(2)
Direction and supervision from director or partner, all work reviewed by someone senior
Engagement quality review (EQR).
Performed for all listed and high risk entities before auditor’s report is signed
This is to stop issuing of wrong opinion (kinda like another opinion from an independent partner-have to be sufficiently experienced eg partner and experienced one so likely not a new partner)-also need a cooling off period if a partner served and then was rotated off.
EQR partner qualities.(3)
-technical competence
-experience of the industry of audit and listed companies (as many EQRs are for listed)
-all partners and staff should be independent
Inspect a selection of engagements for monitoring and remediations.
Complete this based on risk (post-issurance review) or cold review as after auditor’s report has been signed
Will see if engagements live up ton expectations of firm and wider accountancy profession.
This must be done annually.
UK corporate governance code.(3)
The UK Corporate Governance Code also requires the audit committee of a listed company to monitor the independence, objectivity and effectiveness of the external auditors.
Questionnaires are often sent to members of the audit committee, directors, senior management and internal audit.
Within this process, external auditors are rated on factors such as:
communication
quality of reports
expertise
business understanding
value for money.
This area could form part of a SFQ in the exam.
Liability caps.(2)
-Companies Act 2006 introduced this-only cover one financial year at a time, only enforceable if classed and fair and reasonable (court can override and set own), client and firm agree on this amount and could be a combination of factors, proportionate liability is also acknowlegded also eg client can accept so too, shareholders have to accept this too
-Midtier audit firms might negotiate lower caps to win large companies, however low liability caps may not be deemed acceptable by companies making it difficult for firms to obtain client.
Two ways a firm can protect themselves from audit failure.(2)
LLP-Traditionally, accountancy firms operated as normal partnerships, meaning that individual partners had unlimited liability for claims against the firm. SInce 2001, UK law has allowed the firms to incorporate in a limited way, becoming LLPs.
Professional indemnity insurance (PII)-Audit firms must carry this insurance. Any settlement of claims against the firm will be settled by the insurance company.
However, the settlement is only part of the cost - legal fees and partner time are tangible costs, but the damage to the reputation of a firm can have huge financial repercussions.
Which TWO of the following are ways in which the FRC promotes audit quality?
1) Issuing ISAs, Ethical Standards and occasional briefing papers on matters such as professional scepticism
2) Monitoring compliance through reviews of audit firms and making their findings public
3) Requiring professional accounting bodies (such as the ICAEW), to change their requirements in relation to ethics and professional conduct
1&2.
Issuing ISAs, Ethical Standards and occasional briefing papers on matters such as professional scepticism:
The FRC oversees accountancy bodies, and so may make recommendations suggesting how they can improve their activities in relation to ethics and professional conduct.
The accountancy bodies should consider the FRC’s recommendations, but they do not have to implement the recommendations.
You are a partner in a small, newly formed firm of chartered certified accountants.
Which of the following statements in respect of quality management is true in relation to your firm?
-A dedicated quality management department or team is not necessary, quality reviews can be performed by an external consultant
-Quality management requirements can be overlooked in the first year of a firm’s existence
-Engagement quality reviews are not necessary if the firm does not have any higher risk, public interest, or listed clients
-A small firm does not need any specific quality management procedures or policies provided the requirements of ISAs and other assurance standards are followed
Feedback:
All firms of chartered certified accountants must ensure adequate quality measures are in place at all times – there are no exceptions for small or newly formed firms. Engagement quality reviews must be performed for at least one of every partner’s engagements, even if they do not have any riskier clients.
Available Answers
A dedicated quality management department or team is not necessary, quality reviews can be performed by an external consultant (1 Mark)
The normal method of appointing an auditor is for the shareholders of the company to vote on the appointment. What %?
Over 50%! of votes cast.
A client has offered the auditor an audit fee based on a percentage of reported profits. Is this allowed?
No, the firm must reject audit fees based on contingency. (A contingent fee is any fee for services provided where the fee is payable only if there is a favourable result. )
