Q&A Chapter 3: Planning engagements Flashcards
Audit risk: Long association
JUSTIFICATION: - Familiarity/trust/complacency threats
- Auditors may be over influenced by personality and qualities and directors
- Auditors may become too trusting of written representations by management – insufficient rigorous testing b3ecause they are too familiar with the issue ACTIONS: - Periodic rotation of senior staff.
- Engagement partner (ES4)
o Listed: 5 years / 5 years cooling off
o Unlisted: 10 years – consider if they should continue
- Key partner/senior staff (ES4)
o 7 years / 2 years cooling off
Audit risk: Close family
JUSTIFICATION: If position of influence in client is a close family member ACTIONS: - Audit firm can do audit – but individual cannot be involved
Audit risk: Gifts
JUSTIFICATION: - Familiarity / self-interest – bribe (each firm sets own limits)
- Remove objectivity
ACTIONS: - NO unless “clearly insignificant” or “trivial”
Audit risk: Fees (contingent fees, overdue fees and non-audit fee limit)
JUSTIFICATION: - Contingent audit fees = banned
- Overdue fees: could affect audit if the client owes lots of money
- Fee limits: fear of losing client could affect judgement ACTIONS: Overdue fees – prior year fees must be paid before current year appointment.
If not paid – inform ethics partner and stop work… consider resigning
Fee limits: (audit+non-audit fees for client)/(total recurring practice income)
Listed: 10% is too much… 5% consider
Unlisted: 15% is too much… 10% consider
Inform ethics partner, independent review before sign-off, may have to reduce work load, or resign and don’t get reappointed
Audit risk: Employment
JUSTIFICATION: - Familiarity threat: too much reliance on representations of former employee – too trusting
- Former self-interest threat (as manager this person may have been too sympathetic)
- Intimidation threat ACTIONS: - Engagement partner/ independence partner/ key partner – if they move into a position of key management for client, KPMG must resign audit. If vice versa - client becomes key partner, they can’t work on audit for 2Y
- Senior associate manger – if
Audit risk: Financial connections
JUSTIFICATION: - Self-interest: could affect share prices ACTIONS: - Loans ok if ordinary loans – immaterial to both client & firm
- Not allowed if loan influences audit process
Audit risk: Additional services (generic)
JUSTIFICATION: - Self-review threat – auditors may be reluctant to challenge adversely the outcome of a previous engagement or report on colleague’s work
- Possible low balling – low audit fee may be set in order to retain lucrative consultancy work (Why is this a problem?)
ACTIONS: - Use of different teams with separate reporting lines
- Independent partner review of the audit
Audit risk: Valuation services
JUSTIFICATION: - Valuations services are not permitted by ES5 where the valuation would both
o Involve a significant degree of judgement, and
o Have a material impact on the FS
- ES5 par 77
ACTIONS: - No valuations work be undertaken
Audit risk: IT services
JUSTIFICATION: Risk of self review
ES5 par 73 ACTIONS: - NO work on IT systems for which accounting system places sig. reliance
Audit risk: Litigation and legal services
JUSTIFICATION: - Self-review threat / advocacy threats
- E.g. acting as witness / solicitor
- ES5 par 113
ACTIONS: - Do NOT accept services (unless unlisted clients, or clearly not subjective)
Audit risk: Corporate finance services
JUSTIFICATION: - Advocacy, management, self-review threats
- E.g. advice on listings, takeover, financing
- ES5 par 131 ACTIONS: - Should not be accepted unless safeguards:
o Independent teams
o Independent partner review
o External independent advice
Audit risk: Recruitment and remuneration
JUSTIFICATION: - Management threats and familiarity
- ES5 par 115, 117, 121
ACTIONS: Shouldn’t be performed without safeguards.
Small entities: ESPACE
JUSTIFICATION: - ESPACE: ES Provisions Available for Small Entities - Small company – 2 out of 3 applies: o Employees not more than 50 employees o Revenue doesn’t exceed £6.5m o Gross assets
Audit risk: Internal audit
JUSTIFICATION: - Management threat as may be decisions over scope of internal audit, self review threat as reliance may be placed on internal audit reluctant to highlight errors
- ES5 par 63 ACTIONS: - Firm shouldn’t take on audit whereby external audit opinion is based on significant reliance on its internal audit role.
Audit risk: Tax services
JUSTIFICATION: - Management threat ACTIONS: - Firm shouldn’t take on audit whereby external audit opinion is based on significant reliance on its internal audit role
Audit risk: Transaction related services (DD work)
JUSTIFICATION: - Management threat
- E.g. DD
- ES5 par 99 ACTIONS: Shouldn’t be performed without safeguards
Audit risk: Restructuring services
JUSTIFICATION: Management threat, advocacy, self-review ACTIONS: - Entity plans to change capital structure – if entity in financial distress, they can only act in an advisory capacity
Audit risk: Accounting services
JUSTIFICATION: - Management threat, Self-review threat
- ES5 par 1670, 164
ACTIONS: - Providing accounting services for listed audit clients is banned except in emergencies
- Firms must never find themselves in a management role
What are the fundamental principles?
Integrity, objectivity, pro comp and due care, confidentiality, professional behaviour
What are the main threats to objectivity and independence?
Self-interest threat Self-review threat Advocacy threat Familiarity threat Intimidation threat
What happens if one partner gets the assurance wrong?
All partners could be laible
Deciding if a client is risky or not: financial statements
GOOD: always available on time, requiring few adjustments, adequate supporting documents
BAD: late, requiring amendments
Deciding if a client is risky or not: accounting and finance
GOOD: financial statements prepared by qualified chief accountant, adequate finance team
BAD: poorly led, temporary staff, over worked
Deciding if a client is risky or not: IT systems
GOOD: well designed, integrated, bespoke, tested by internal audit
BAD: lots of systems, poor track record of success
