Regulations, ethics, accepting and managing engagements and current issues

Question 1

Auditing rival firms

Answer 1

Ensure staff are aware of confidentiality issues
Obtain informed consent of both parties
Use different partners and teams for each client
Conduct an independent review of arrangements
Ensure information barriers are in place

Question 2

Bonus contingent on achieving targets

Answer 2

Threatens objectivity - self-interest threat
Employees may promote services not required by the client
Audit quality may suffer due to a lack of scepticism
Audit firm should establish policies to prevent such an arrangement

Question 3

Engagement letter content

Answer 3

Objective and scope of the audit
Management and auditor’s responsibilities
Form and content of communication
Limitations of the audit - risk that material misstatement remains undiscovered
Unrestricted access to records

Question 4

Objectivity and independence procedures

Answer 4

Rotate engagement partners - 5 years for listed entities, 10 years if non-listed
Process in place for employees to report any financial interests or close business relationships in the audited entity
Appointment of an ethics partner to ensure safeguards are sufficient
Employee training to help identify and deal with threats to objectivity and independence

Question 5

Ethical issues from second opinion

Answer 5

May compromise the opinion of the existing auditor
Client may be opinion shopping
May threaten professional competence if not in possession of all the facts
Encourages firms to give opinion desired by clients

Question 6

Second opinion procedures

Answer 6

Obtain client’s permission to contact the existing auditor
Notify the auditor of the work to be undertaken so that the firm is in full possession of all the facts
Refuse to act if the client refuses permission

Question 7

Factors requiring revision of engagement terms

Answer 7

Indication that the entity misunderstands the objective and scope of the audit
A significant change in ownership / management or the size / nature of the entity
A change in legal / regulatory requirements, financial reporting framework, engagement partner or the structure of the audit firm

Question 8

Trade receivables ledger evidence required

Answer 8

Payment not on ledger - Payment received after year end (bank statement / receipts)
Discount - Entitlement to discount (contract / invoice)
Wrong goods - Goods returned (credit note / goods returned record)

Question 9

Management integrity procedures

Answer 9

Obtain client’s permission to contact the previous auditor / obtain references from reliable 3rd parties
Search the internet and relevant databases
Hold discussions with directors
Inspect prior year’s audit reports

Question 10

Engagement quality reviewer attributes

Answer 10

Senior person within the firm / suitable qualified external person
Experience of the industry and type of company
Independent of the engagement team and the client

Question 11

Overdue fees

Answer 11

Threaten self-interest principle
Ideally arrange for settlement
Consider resigning from the engagement if fees remain unsettled
Alternatively, apply appropriate safeguards (second partner review) and notify the ethics partner

Question 12

Non compliance with laws and regulations

Answer 12

Indicate a lack of management integrity
May impact the financial statements due to fines, provisions, contingent liabilities arising from legal claims and going concern issues if authorities intervene
Breaching laws and regulations to save costs = money laundering

Question 13

Threat of removal procedures

Answer 13

Discuss the issue with directors
Conduct independent internal quality review to ensure the intimidation threat has not impaired objectivity elsewhere
Seek advice from lawyers / ethics partner to limit the firm’s exposure to any risk
Consider resignation due to breakdown of trust and doubtful management integrity

Question 14

Outgoing auditor’s responsibilities

Answer 14

Prepare statement of circumstance to specify reasons for ceasing to hold office
Obtain permission from client to reply to prospective auditor - set out reasons as to why the firm is not seeking reappointment
Maintain client confidentiality and AML ID records
Have the right to make written representation and request directors to circulate to members / attend and speak at general meeting

Question 15

Management’s fraud responsibilities

Answer 15

Preventing fraud
Detecting fraud
Implementing system of internal control
Safeguarding the assets of the company

Question 16

Auditor’s fraud responsibilities

Answer 16

Design audit procedures to detect material misstatement whether due to fraud or error or obtain reasonable assurance that the financial statements are free from material misstatement
Report suspicions to the relevant authority
Avoid tipping off

Question 17

Police request to auditor procedures

Answer 17

Ask for request to be in writing
Do not disclose information unless there is a legal or professional duty (court order)
Ask the client for permission to disclose information
Consider future involvement and reputational risk
Re-review the audit work in the areas in which the police have requested information