Ch6 - accepting engagments

Question 1

How might an assurance firm obtain an audit engagement?

Answer 1

• Is asked by a potential client to replace another accountant
• Considers tendering for an engagement held by another accountant
• Considers undertaking work that is complementary or additional to that of another accountant

Question 2

What are the consideration of the client when evaluating its tenders received?

Answer 2

• The proposed fee
• The quality of the service the prospective auditors are likely to provide
• The firm’s industry-specific knowledge and experience
• The proposed personnel on the audit team
• References obtained about the audit firm

Question 3

What is Lowballing?

Answer 3

the practice of charging less than the ‘market rate’ for the audit. Lowballing is not considered unethical; however, it does increase the self-interest threat of not being able to complete the audit to the appropriate standards in a commercial way

Question 4

As per the ICAEW code of ethics, what are some of the items to consider when proposing a fee for an audit engagement to the client?

Answer 4

• The seniority and professional experience of the persons engaged on the work
• The time expended by each
• The degree of risk and responsibility which the work entails
• The nature of the client’s business, the complexity of its operation and the work to be
  performed
• The priority and importance of the work to the client
• Any expenses that will be incurred

Question 5

ISA 220 and ISQC 1 require the auditor to obtain information considered necessary in order to
decide whether to continue an existing engagement or accept a new engagement. What must the auditor therefore consider?

Answer 5

• An assessment of the risk involved in the engagement
• Ethical considerations (see Ch 4)
• Resources available to carry out the work
• Companies Act 2006 considerations

Question 6

Why do audit firms carry out risk analysis before accepting the clients?

Answer 6

• To identify clients that are too risky to accept,
• To determine an appropriate fee for the engagement, and
• To lay foundations for understanding the risks associated with the engagement if it is taken on and the amount of work that will have to be undertaken.

Question 7

What kind of information will be looked at when conducting risk analysis?

Answer 7

• Nature of the companies business, and areas that might require more work or specialised expertise
• Integrity of the senior management
• Company’s financial record, resources, and outlook
• Quality of the company’s internal control environment
• Whether the company has any unusual transactions as per the published financial statements of the company.

Question 8

What must a prospective audit firm do when approached by a client?

Answer 8

They must seek to first communicate with the existing auditor. The prospective auditor should write to the existing auditor, seeking information that could
influence his decision as to whether he may properly accept the appointment.

Once the prospective auditor has received confirmation that there are no reasons not to act, or has
become satisfied that he can properly act, and is prepared to accept nomination/appointment, he
should inform the client.

Question 9

What must an existing auditor do when approached by a prospective auditor?

Answer 9

The client must give the existing auditor written consent to discuss the affairs with the prospective auditor.

Question 10

What actions should the prospective auditor take if the existing auditor fails to respond on information on the client?

Answer 10

The prospective auditor should write to the existing auditor (by recorded delivery) stating an intention to accept the appointment in the absence of a reply within a specified period. The existing auditor’s silence would imply that there were no adverse comments.

Question 11

What should an existing auditor do if a prospective auditor does not reach out for additional information?

Answer 11

The existing auditor should not volunteer information and should do nothing. This is of course if there are any matters which the prospective auditor should be aware of, such as:

• Unlawful acts by the client
• Unpaid fees
• Differences of opinion between the auditor and the client

Question 12

What should the existing auditor do if the client fails or refuses to grant the existing auditor or adviser permission to discuss the client’s affairs with the proposed auditor?

Answer 12

The existing auditor or adviser should report that fact to the prospective auditor or adviser, who should carefully consider the impact of this on his decision whether to accept the appointment/nomination or not.

Question 13

What actions should a professional accountant take if invited to undertake work related to continuing work carried out by another professional adviser

Answer 13

The professional advisor should notify the existing adviser, and request information from the existing adviser.

Notification should always be given to the existing adviser unless the client advances reasons which persuade the prospective firm that, in the circumstances, the existing adviser should not be informed.

Question 14

How is an auditor appointed by a company?

Answer 14

the auditor first needs to be appointed by the members (shareholders) via an ordinary resolution (>50% vote in a general meeting).

Question 15

When must an auditor be appointed?

Answer 15

The appointment must be made by the end of the 28 days after the date on which the previous year’s financial statements are circulated to members.

If an auditor is not appointed within this time, the existing auditor is automatically reappointed.

Question 16

In which circumstances does an auditor not need to be appointed within the set timelines, and by ordinary resolution?

Answer 16

• Appoint an auditor for the first time, or
• Fill a casual vacancy, for example when the existing auditor resigns during the year

In both cases, the members must then reappoint the auditors at the next AGM by ordinary resolution.

Question 17

What happens if an auditor is not appointed within the designated timelines?

Answer 17

If no auditor has been appointed at the appropriate time, the company must inform the Secretary of State within one week of the relevant timing expiring and the Secretary of State will then appoint an auditor.

Question 18

How are auditors removed by the client? What rights do they have in this process?

Answer 18

Auditors are removed by ordinary resolution with special notice at a general meeting (although the process is generally initiated by the directors of the company). The outgoing auditor must make a statement of circumstances (see below) to the company’s registered office.

The auditor has the following rights:

• To request, attend and speak at a general meeting of the members.
• To have a written representation circulated to all members.

Question 19

If an auditor chooses to resign throughout the year, what actions must be taken? What are the rights in doing so?

Answer 19

They must submit written notice to the company at the company’s registered office. The auditor must also submit a statement of circumstances.

The auditor has the following rights:

• To request that the directors convene a general meeting of the company so that the auditor can explain the circumstances connected with the resignation
• To require the company to circulate the statement of circumstances in advance of the next general meeting

Question 20

What actions must the company take upon receiving notice of resignation from the auditors?

Answer 20

On receipt of the auditor’s resignation the company must then notify:

• The Registrar of Companies
• Anyone entitled to receive a copy of the company’s accounts.

Question 21

What are the requirements of an auditor who ceases to hold office as an auditor of a non PIE?

Answer 21

They are required to deposit at the
company’s registered office:
- A statement of the circumstances connected with his ceasing to hold office which are to be brought to the attention of the members or creditors of the company; or
- A statement that there are no such circumstances if he considers this to be the case.

Auditors of PIE do not have the option to state there are no circumstances to be brought to the attention of the shareholders.

Question 22

What document covers the terms of an audit engagement? What is included within this document?

Answer 22

An engagement letter sets out the terms of the engagement letter. The letter should include:
- The objective and scope of the audit of financial statements (including reference to
applicable legislation, regulations, financial reporting framework and auditing standards)
- Management’s responsibilities (including responsibility for the financial statements and the company’s system of internal control)
- The auditor’s responsibilities
- The form and content of reports and communications that will arise from the audit
- The fact that due to the test nature and other limitations of an audit, there is an unavoidable risk that some material misstatement may remain undiscovered
- The auditor’s right to unrestricted access to records, documents and other information requested in connection with the audit

Question 23

Is a new EL required for a recurring audit each year?

Answer 23

When the audit is a recurring audit, it is not necessary to issue a new letter each year. However, the auditors should consider every year whether a new letter is required.

The following factors may indicate a new letter is required:

• Indications that the client misunderstands the terms of the engagement
• Revised or special terms of the engagement
• A recent change in senior management or directors
• A significant change in ownership, nature or size of the company
• Legal or regulatory requirements
• A change in the financial reporting framework adopted in the preparation of the financial statements
• A change in other reporting requirements