Chapter 3 - accepting engagements

Question 1

Audit by tender

Answer 1

when the audit firm bids against other firms in order to win the contract to carry out the work.

During the tender, the firm will set out the reasons why the client – who may be either new or existing – should choose it to carry out the audit.

Question 2

lowballing

Answer 2

name given to the practice of charging less than the market rate for the audit

care should be taken when a low fee is charged, completed to an acceptable standard

Question 3

Fee determinants

Answer 3

• Personnel
• Time taken for work
• Expenses incurred
• Nature of client/ business operations
• Degree of risk/responsibility
• Importance of work to client

Question 4

Risk analysis allows the firm to:

Answer 4

• identify clients that are considered too high risk to take on
• determine an appropriate audit fee – the auditor will charge a higher fee for higher-risk engagements
• develop an initial understanding of risk areas that will require more work to be carried out.

Question 5

Auditors may be appointed by:

Answer 5

• The directors
• The members (>50%)
• The secretary of state (if not auditor has been appointed)

Question 6

Preconditions for an audit:

Answer 6

• Determine whether the financial reporting framework to be applied in the preparation of financial statements is acceptable
• Preparing with applicable financial reporting framework
• Internal control necessary for the prep of FS to be free from material misstatement
• Providing the auditor with access to information relevant to the audit

Question 7

Engagement letter purpose:

Answer 7

Sets out terms of engagement which act as a contract between assurance provider and client

Question 8

Engagement letter main components:

Answer 8

• Objective and scope
• Responsibilities
• Auditors right to access records, documents and information required during an audit
• Forms and content of reports/ communications on audit

Question 9

removal of auditor - duty of outgoing auditor

Answer 9

• prepare and submit a statement of circumstances to the company’s registered office ( a statement of matters to be brought to the attention of shareholder or creditors or a statement that there are no such circumstances

Question 10

removal of auditor - rights of outgoing auditor

Answer 10

• prepare written representation 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
• listed company stricter- auditor has to give reason as to why they are leaving