CHAPTER 2: Process of assurance: obtaining an engagement

Question 1

Obtaining an engagement

Answer 1

• accountants are permitted to advertise for clients within certain professional guidelines, the details of which you do not need to know.
• accountants are often invited to tender for particular engagements, which means that they offer a quote for services, outlining the benefits of their firm and personnel, usually in competition with other firms which are tendering at the same time.

Question 2

Appointment considerations

Answer 2

Before a new audit client is accepted, the auditors must determine whether there are any independence or other ethical issues likely to cause significant problems with the ethical code

Question 3

Acceptance procedures

Answer 3

• Ensure professionally qualified to act
• Ensure existing resources adequate
• Obtain references
• Communicate with existing/predecessor auditors

Question 4

Ensure professionally qualified to act

Answer 4

Consider whether disqualified on legal or ethical grounds, for example if there would be a conflict of interest with another client.

Question 5

Ensure existing resources adequate

Answer 5

Consider available time, staff and technical expertise.

Question 6

Obtain references

Answer 6

Make independent enquiries if directors not personally known.

Question 7

Communicate with existing/predecessor auditors

Answer 7

Enquire whether there are reasons/circumstances behind the change which the new auditors ought to know, also as a matter of courtesy.

Question 8

Some of the basic factors for consideration

Answer 8

• The integrity of those managing a company will be of great importance, particularly if the company is controlled by one or a few dominant personalities.
• The audit firm will also consider whether the client is likely to be high or low risk to the firm in terms of being able to draw an appropriate assurance conclusion in relation to that client. The following table contrasts low and high risk clients.

Question 9

Low risk

Answer 9

• Good long-term prospects
• Well-financed
• Strong internal controls
• Conservative, prudent accounting policies
• Competent, honest management
• Few unsual transaction

Question 10

High risk

Answer 10

• Poor recent or forecast performance
• Likely lack of finance
• Significant control weakness
• Evidence of questionabke integrity, doubtful accounting policies
• Lack of finance director
• Significant uexplained transaction or transactions with connected companies

Question 11

Appointment considerations (next)

Answer 11

• The specific risks should be identified and documented
• the expected fees from a new client should reflect the level of risk expected
• The audit firm will generally want the relationship with a client to be long term => more understandable => better services
• Conflict of interest problems can be significant; the firm should establish that no existing clients will cause difficulties as competitors of the new client. Other services to other clients may have an impact here, not just audit.
• The audit firm must have the resources to perform the work properly, as well as any specialist knowledge or skills. The impact on existing engagements must be estimated, in terms of staff time and the timing of the audit.

Question 12

Sources of information about new clients

Answer 12

• Enquiries of other sources
• Review of documents
• Previous accountants/auditors
• Review of rules and standards

Question 13

Enquiries of other sources

Answer 13

Bankers, solicitors

Question 14

Review of documents

Answer 14

Most recent annual accounts, listing particulars, credit rating

Question 15

Previous accountants/auditors

Answer 15

Previous auditors should be invited to disclose fully all relevant information

Question 16

Review of rules and standards

Answer 16

Consider specific laws/standards that relate to industry

Question 17

The following procedures should be carried out after accepting nomination

Answer 17

• Ensure that the outgoing auditors’ removal or resignation has been properly conducted in accordance with national legislation.
• Ensure that the new auditors’ appointment is valid. The new auditors should obtain a copy of the resolution passed at the general meeting appointing them as the company’s auditors.
• Set up and submit a letter of engagement to the directors of the company.

Question 18

the outgoing auditors have fees still owing by the client

Answer 18

the new auditors need not decline appointment solely for this reason.

Question 19

Once a new appointment has taken place

Answer 19

• the new auditors should obtain all books and papers which belong to the client from the outgoing auditors.
• The outgoing auditors should ensure that all such documents are transferred promptly, unless they have a lien (a legal right to hold on to them) because of unpaid fees.
• An outgoing auditor cannot have a lien over the accounting records of a registered company as the Companies Act requires these to be available for public inspection.
• The outgoing auditors should also pass any useful information to the new auditors if it will be of help, without charge, unless a lot of work is involved.

Question 20

Other assurance engagements

Answer 20

The legal considerations relating to audit will not be relevant to other assurance engagements, but the ethical, risk and practical considerations will be just as valid.

Question 21

Money laundering regulations

Answer 21

assurance firms must keep certain records about clients and undertake what is known as client due diligence

Question 22

The identity of clients should be checked

Answer 22

• For individuals: obtaining official documents including a photograph and identifying the client’s full name and permanent address
• For companies: obtaining similar legal information from the Registrar of Companies

Question 23

The purpose of an engagement letter is to:

Answer 23

• define clearly the extent of the firm’s responsibilities and so minimise the possibility of any misunderstanding between the client and the firm
• provide written confirmation of the firm’s acceptance of the appointment, the scope of the engagement and the form of their report.

Question 24

The following items shall be included in the engagement letter

Answer 24

• the objective of the audit of financial statements
• the scope of the audit, which could include reference to applicable legislation, regulations, or pronouncements of professional bodies to which the auditor adheres
• The auditor’s responsibility
• the reporting framework that is applicable for the financial statements being prepared, for example International Financial Reporting Standards
• management’s responsibility to prepare the financial statements and to provide the auditor with unrestricted access to whatever records, documentation and other information is requested in connection with the audit
• the form of any reports of results of the engagement

Question 25

the auditor may wish to include in the letter the following items:

Answer 25

• the form of any other communication of the results of the engagement
• the fact that because of the test nature and other inherent limitations of an audit, together with the inherent limitations of any accounting and internal control system, there is an unavoidable risk that some material misstatements may remain undiscovered
• Arrangements regarding the planning of the audit
• expectation of receiving from management written confirmation of representations made in connection with the audit
• agreement of the client to provide the auditor with information in time to allow the auditor to complete the audit in line with the proposed timetable
• Basis on which fees are computed and any billing arrangements request for the client to confirm the terms of the engagement by acknowledging receipt of the engagement letter

Question 26

the auditor may wish to include in the letter the following items: (2)

Answer 26

• arrangements concerning the involvement of other auditors and experts in some aspects of the audit
• arrangements concerning the involvement of internal auditors and other client staff
• arrangements to be made with the predecessor auditor, if any, in the case of an initial audit
• any restriction of the auditor’s liability when such possibility exists
• a reference to any further agreements between the auditor and the client
• any obligations to provide audit working papers to other parties