Process of assurance: obtaining an engagement

Question 1

Are accountants permitted to advertise for clients?

Answer 1

Yes. Accountants are permitted to advertise for clients within certain professional guidelines

Question 2

Can accountants be invited to tender for particular engagements?

Answer 2

Yes. 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 3

Two key methods of obtaining an engagement:

Answer 3

• Tender
• Advertising

Question 4

Matters to consider before tendering

Answer 4

• cost of preparing a tender, if we do not win
• what would be a fair and realistic fee
• can we deliver what we promise?

Question 5

Contents of a tender document:

Answer 5

• amount and basis of fee
• requirements of an audit and other services required by the client
• selling points of the firm

Question 6

Tendering

Answer 6

In a tender, the company invites a small number of audit firms to ‘pitch’ for the work. They will provide the firms with some information about the company and their requirements, as well as allowing a period where further questions will be asked. The firms, if interested, will complete a tender document, usually using a template provided by the prospective client, detailing what the firm can offer and why they should be picked. Each firm will then attend an interview or presentation where they can further sell themselves and take any questions the company may have. As a result of this, a decision will be made as to which firm to engage.

Question 7

Factors to consider prior to acceptance of an audit:

Answer 7

• Are we professionally qualified to act?
• Have we communicated with existing or previous auditors?
• Do we have adequate resources available?
• Have we fulfilled the requirements to comply with the Money Laundering Regulations 2007?
• Have we assessed the level of management integrity?
• Have we assessed the level of risk?

Question 8

What are six signs that a client is likely to be low risk?

Answer 8

Good long term prospects

Well-financed

Strong internal controls

Conservative, prudent accounting policies

Complete, honest management

Few unusual transactions

Question 9

What are six signs that a client is likely to be high risk?

Answer 9

Poor recent or forecast performance

Likely lack of finance

Significant control weaknesses

Evidence of questionable integrity, doubtful accounting policies

Lack of finance director

Significant unexplained transactions or transactions with connected companies

Question 10

What should be done when a company’s audit is determined as anything other than low risk?

Answer 10

Where the risk level of a company’s audit is determined as anything other than low, then the specific risks should be identified and documented.

Question 11

Should expected fees from a new client reflect the level of risk expected?

Answer 11

Yes.

Generally, the expected fees from a new client should reflect the level of risk expected.

Question 12

What are 3 sources of information about new clients?

Answer 12

• financial statements
• internal audit reports
• management accounts

Question 13

what external information should be gathered before taking on a new client?

Answer 13

• credit ratings
• bankers, solicitors
• law and regulations
• internet research

Question 14

for money laundering reasons, how long should client identification documents be kept for?

Answer 14

minimum of 5 years and until 5 years have elapsed since the relationship with the client has been ceased

Question 15

What three procedures should be carried out after accepting nomination?

Answer 15

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 16

all engagement letters must include:

Answer 16

• scope of the audit
• responsibilities of auditor and client management
• identification of financial reporting framework to be used
• level of access to books and records
• form and content of reports to be issued

Question 17

reasons to update an engagement letter:

Answer 17

• new board members at the clients company
• new standards that need to be complied with
• the need to remind the client of their responsibilities

Question 18

Once an appointment has taken place, what should the new auditors obtain from the outgoing auditors?

Answer 18

Once a new appointment has taken place, 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.

Question 19

What are the two purposes of an engagement letter?

Answer 19

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 20

What does ISA (UK) 210, Agreeing the Terms of Audit Engagements require?

Answer 20

ISA (UK) 210, Agreeing the Terms of Audit Engagements requires that the auditor and the client agree on the terms of the engagement. The agreed terms must be in writing and the usual form would be a letter of engagement.

Question 21

What are thirteen optional other items that the auditor may wish to include in the engagement letter?

Answer 21

The form of any other communication of the results of the engagement

Recognising that 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

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

Where relevant:

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

Question 22

When should a letter of engagement be sent?

Answer 22

The auditors should send an engagement letter to all new clients soon after their appointment as auditors and, in any event, before the commencement of the first audit assignment.

Question 23

what should be included in an engagement letter

Answer 23

• objectives of work/ auditors responsibilities
• scope of the audit
• reporting framework
• managements responsibilities to prepare financial statements
• form of any reports
• level of access to books and records