Chapter 2 - Accepting engagements

Question 1

What is a tender?

Answer 1

Firm bids/sets out reasons why they should be chosen to carry out the audit.

Question 2

List some of the reasons firms use to win a tender.

Answer 2

• Proposed Fee
• Quality of service
• Knowledge of the business/industry
• Proposed personnel

Question 3

Define lowballing.

Answer 3

Charging fees lower than market rate.

Question 4

Which threat will arise by lowballing?

Answer 4

Self interest

Firm may be unable to make a profit

They may be tempted to cut corners

Instead of completing to required standard

Question 5

Suggest a safeguard against lowballing.

Answer 5

Independent Quality Control of audit to make sure work is at acceptable standard.

Question 6

ICAEW code of ethics: How should audit fee be determined?

Answer 6

• Personnel required
• Time taken
• Expenses
• Level of risk/responsibility
• Nature of client/how complex their operations are
• importance of work to client

Question 7

Why do a risk assessment before accepting an engagement?

Answer 7

• identify clients that are too high risk
• to determine appropriate audit fee
• initial understanding of risk areas that might need more work

Question 8

Which 4 categories do matters to do with accepting an engagment fall into?

Answer 8

1. Risk analysis
2. Ethical considerations
3. (Practical) Resources available to carry out work
4. *Legal) Companies Act 2006 considerations

Acronym: LERP

Question 9

If there is a change in professional appointment

What should the PROSPECTIVE auditor do?

Answer 9

• ask prospective client permission to contact existing auditor
• seek info which could influence decision

Question 10

If there is a change in professional appointment

What should the EXISTING auditor do?

Answer 10

• ask client permission to communicate with prospective auditor
• respond to requests and let them know of any matters

Question 11

Companies Act 2006 considerations:

When can the Director/Management appoint an auditor?

Answer 11

1. Fill a casual vacancy

2 . First appointment of auditors

Question 12

Companies Act 2006 considerations:

When can the Members appoint an auditor?

Answer 12

Shareholders pass an ordinary resolution in a general meeting (>50% vote)

Appointment within 28 day deadline after last filing of F/S - otherwise need to use existing auditor

Question 13

Companies Act 2006 considerations:

When can the Secretary of State appoint an auditor?

Answer 13

Rare

When no auditor has been appointed in time.

Question 14

What SHOULD an audit engagement include?

Answer 14

• objective/scope
• management responsibilities
• auditor responsibilities
• form/content of report
• right to access records/documents/info
• expectation that management will need to provide written representation

Question 15

What MAY an audit engagement include?

Answer 15

• fees
• practicalities
• timetable

Question 16

Is there a requirement that an audit engagement letter should be sent out EVERY YEAR?

Answer 16

NO

Question 17

Why do non-audit assurance engagements need an engagement letter?

Answer 17

There is more scope for variation in work agreed

Question 18

Assurance engagements are covered by what standards?

Abbreviation and Full

Answer 18

ISAE - International standard assurance engagement

ISRE - International standard review engagement

Question 19

What SHOULD non audit assurance engagement letters include?

Answer 19

• the work set to be carried out

- form/content of report

Question 20

What is the PROCESS to REMOVE an auditor?

Answer 20

Ordinary resolution passed in a general meeting

Question 21

What is the DUTY of an outgoing auditor?

Answer 21

Prepare/submit a statement of circumstances to company’s registered office

statement of circumstances = any matters to be brought to attention of shareholders/creditors

or state no circumstances

Question 22

What are the RIGHTS of an auditor outgoing by REMOVAL?

Answer 22

• written representation circulated to members of company

- receive notice/attend/speak at general meeting where appointment is considered

Question 23

What is the PROCESS when an auditor resigns?

Answer 23

written notice to company’s registered office

Question 24

What are the RIGHTS of an auditor outgoing by RESIGNATION

Answer 24

• written representation circulated to members of company
• request/attend/speak at Extraordinary General Meeting (EGM)
• can be called at SHORT NOTICE
• max 4 weeks after called

Question 25

Explain how LISTED companies have stricter requirements for outgoing auditors.

Answer 25

can’t just say no circumstances

if auditor is unsure about a doubt –> can’t walk away without explanation