Chapter 2 Accepting engagements Flashcards
1.1 Obtaining engagements – tender for an audit
The firm may be asked to engagement directly, the most common method is by tender where the firm bids to carry out the work. During the tender the firm sets out the proposed fee, quality of service, knowledge of the business and industry and proposed personnel.
1.2 Setting a fee
The audit firm may charge whatever it feels is appropriate for the engagement. Lowballing is the practice of charging less than the market rate for the audit. Appropriate safeguards should include quality control of the audit to ensure the work has been completed to an acceptable standard. The ICAEW code of ethics states that fees should be determined by reference to:
- Personnel working on the engagement
- Time taken to complete the engagement
- Degree of risk and responsibility that the work entails
- Nature of the client’s business
- Importance of the work to the client
- Expenses that will be incurred
The basis for fee should be discussed with the client as soon as possible and is likely to be included in the tender document so that is it possible to compare the value for money offered by each firm in the tender process.
2.1 Acceptance considerations
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. The matters considered prior to acceptance fall into four categories: risk analysis, ethical considerations, resources available and Companies Act 2006.
2.2 Risk analysis
A preliminary risk assessment should be carried out prior to acceptance. The purposes of this are to:
- Identify clients that are considered too high risk to take on
- Determine an appropriate audit fee
- Develop an initial understanding of risk areas that will require more work/different resources
2.3 Ethical considerations
ICAEW code of ethics section 320 covers the requirements for outgoing and incoming auditors when there is a change in professional appointment. The requirements for prospective auditor are to ask the prospective client for permission to contact the existing auditor, seek information which could influence the appointment decision from the existing auditor and consider their reply.
The requirement for the existing auditor is to seek client permission to communicate with the prospective auditor, respond to requests for information and either state that there are no matters of which the prospective auditor should be aware, or set out any such matters.
2.4 Companies Act 2006 considerations
Companies Act 2006 sets out the legal requirements in relation to the appointment of auditors. Auditors may be appointed by directors (only allowed in two circumstances to fill a casual vacancy and first appointment of auditors), the members (shareholders appoint auditor by passing an ordinary resolution in a general meetings (more than 50% votes cast). Appointment must be made within 28 days after the latest date for the filing of the accounts, or the existing auditor is deemed to be reappointed) and the secretary of state (rare circumstances where no auditor has been appointed by the relevant time).
3.1 Terms of audit engagements
ISA 210 requires that the terms of an audit engagement are in writing and states the engagement letter must include: the objectives and scope of the audit of accounts, management’s responsibilities, auditor’s responsibilities, form and content of reports and communications on the audit, auditors right to access records and the expectation that management will provide written representations.
It may also cover fees and a timetable. For recurring audits there is no standard requirement that a new engagement letter is sent. The auditor should consider whether a new letter is required, this is necessary where there are changes in the terms of engagement or changes in the board of directors.
3.2 Other assurance engagements
An engagement letter is needed for other assurance work, and there is more scope for variation:
- Audits are subject to a range of rules and guidelines – companies act 2006, auditing standards etc
- Other assurance engagements may be covered by international standards on assurance engagements or international standards on review engagements
ISAE 3400 and ISRE 2400 sets the terms of engagement for two typical non-audit engagements.
4.1 Ceasing to be auditor - removal
An auditor can be removed by an ordinary resolution passed in a general meeting. The duty of outgoing auditor is to prepare and submit a statement of circumstances to the company’s registered office (a statement of matters to be brought to the attention of shareholders or creditors or a statement that there are no such circumstances). The rights of the outgoing auditor are to prepare written representations to be circulated to the members of the company. Receive notice of, attend and speak at the general meeting where appointment is to be considered.
4.2 Resignation of an auditor
An auditor can submit written notice to the company’s registered office. The duty of the outgoing auditor is to prepare and submit a statement of circumstances. The rights of the auditor is to prepare written representations circulated to members of the company, and to request, attend and speak at an extraordinary general meeting, which can be called at short notice.
The statement of circumstances cannot just state that there are no circumstances to be brought to the attention of shareholders or creditors. This makes it difficult for an auditor who thinks something is wrong at a listed company, but is not sure, to walk away without providing an explanation to the members.
