Accepting Engagements - Chapter 3

Question 1

what is the most common way auditors obtain audits?

Answer 1

tender (bidding)

Question 2

how do tenders work?

Answer 2

firm sets out reasons as to why they should be chosen

e.g., proposed fee, quality of service, industry knowledge, proposed personnel

Question 3

lowballing?

Answer 3

when a firm charges below market rate for an audit engagement

Question 4

safeguards for lowballing?

Answer 4

EQR to ensure audit quality remains high and no cutting corners occurs

Question 5

harms of lowballing?

Answer 5

lowballing can result in auditors being less incentivised to work hard and as a result harms audit quality and encourages corner cutting to keep costs low

Question 6

what are the 6 fee determinants according to ICAEW code of ethics?

Answer 6

• personnel
• importance of work
• expenses incurred
• nature of client operations
• time taken for audit work
• degree of risk

Question 7

must basis for computation of audit fees be disclosed to the client?

Answer 7

yes

it’s likely to be in the tender document

Question 8

audit acceptance matters to be considered?

Answer 8

• risk analysis
• resources
• ethical considerations
• companies act 2006

Question 9

preliminary risk assessment’s purpose?

Answer 9

must be done prior to the audit to
- determine appropriate fee
- identify high risk clients
- foresee areas that may require more work/attention

Question 10

prospective auditors must…

Answer 10

contact outgoing auditor (upon client permission)

consider their reply

Question 11

outgoing auditors must…

Answer 11

respond to prospective auditors’ requests for info (upon client permission)

Question 12

must the firm consider if they have sufficient resources to conduct the audit?

Answer 12

yes

Question 13

who may appoint auditors?

Answer 13

• directors (to fill a vacancy)
• shareholders
• secretary of state (when nobody’s appointed)

Question 14

only accept audit engagements when which preconditions are met?

Answer 14

• correct FR framework is used
• management understand their responsibilities

Question 15

management responsibilities during an audit engagement include?

Answer 15

• provide auditor w/ info
• use correct FR framework
• implement adequate controls

Question 16

ISA210?

Answer 16

outlines what an engagement letter should include

Question 17

purpose of an engagement letter?

Answer 17

to set out the terms of the engagement to mitigate confusion

contract between client and auditor

Question 18

contents of an engagement letter?

Answer 18

• objective & scope
• responsibilities of auditor & management
• auditor’s rights to access info
• form & content of reports
• basis of fees
• need for written reps
• audit timetable

Question 19

for recurring audits, must new engagement letters be issued annually?

Answer 19

no

new engagement letter is necessary if:
- changes in board of directors
- changes in terms of engagement

Question 20

are engagement letters necessary for other assurance engagements (e.g., due diligence, forecast reviews etc)?

Answer 20

yes

arguably more important for other assurance engagements as the scope is wider (beyond the FSs)

Question 21

what sets out the legal requirements when auditors cease to hold office?

Answer 21

companies act 2006

Question 22

duty & rights of auditors when removed?

Answer 22

• duty to submit a statement of circumstances to the client’s registered office
• right to prepare written reps to be circulated to shareholders
• right to attend general meeting

Question 23

duty & rights of auditors when resigned?

Answer 23

• duty to submit statement of circumstances to the client’s registered office
• right to prepare written reps to be circulated to shareholders
• right to attend extraordinary general meeting