AA - Chapter 3 - Accepting Engagements

What is a tender?

where the firm bids to carry out the work.

During the tendering process, what 4 things may a firm advertise to the prospective client?

1. proposed fee (& basis of fee)

2. quality of service

3. knowledge of the business and industry

4. proposed personnel

What is the legal requirement for all UK PIEs for retendering and changing auditor

All UK PIEs (listed companies, banks, building societies and relevant insurers) to retender for their external audit every 10 years and change auditor at least every 20 years.

What is retendering?

Process of reissuing a request to tender to potential service providers

What is meant by lowballing?

The practice of charging less than the market rate for the audit, with hopes to charge higher fees if they get more work with the client

What kind of threats and/or risks can arise with lowballing? What are possible safeguards?

• Self-interest threat could arise, detection risk may increase

Appropriate safeguards would include an engagement quality review of the audit to ensure the work has been completed to an acceptable standard

What are the 6 fee determinants according to ICAEW code of ethics?

1. Personnel - WHO will be engaged in the work? - consider their seniority and experiences

2. Time taken for work - HOW LONG will it take to complete the work - staff need enough time & think about charge out rates

3. Expenses incurred - ALL expenses incurred will have to be charged to the client e.g. travel expenses

4. Nature of client business/operations - Complexity and nature of client’s operations will determine the fee

5. Degree of risk/responsibility - The higher risk/responsibility, the higher the fee

6. Importance of work to client - Urgency & level of priority of work client needs to be considered

What are 4 acceptance matters to consider?

1. Risk analysis

2. Ethical considerations - Are there any ethical barriers to acceptance?

3. Resources - Does the firm have adequate resources?

4. Companies Act 2006

Why should a preliminary risk assessment by carried out before acceptance?

1. identify clients that are considered too high risk to take on

2. determine an appropriate audit fee

3. develop an initial understanding of risk areas that will require more work/different resources.

What the 3 requirements of the prospective auditors according to ICAEW Code of Ethics section 230?

1. Ask the prospective client for permission to contact the existing auditor.

2. Contact the existing auditor seeking information which could influence the decision to accept appointment.

3. Consider the existing auditor’s reply

What the 3 requirements of the existing auditors according to ICAEW Code of Ethics section 230?

1. Seek client permission to communicate with the prospective auditor.

2. Respond to requests for information.

3. Either state that there are no matters of which the prospective auditor should be aware or set out any such matters

Under Companies Act 2006, when can the directors appoint an auditor?

ONLY allowed in 2 circumstances:

1. to fill a casual vacancy

2. first appointment of auditors. (1st year audit)

Under Companies Act 2006, when can the members appoint an auditor?

• Shareholders appoint the auditor by passing an ordinary resolution in a general meeting (> 50% votes cast).

• Appointment must be made within 28 days after the latest date for the filing of the financial statements, or the existing auditor is deemed to be reappointed

Under Companies Act 2006, when can The Secretary of State appoint an auditor?

In rare circumstances, where no auditor has been appointed by the time the audit is required

What must auditors obtain the agreement of management that it acknowledges and understands its responsibilities for the following, according to ISA 210?

1. Preparing the financial statements in accordance with the applicable financial reporting framework

2. Internal control necessary for the preparation of the financial statements to be free from material misstatement

3. Providing the auditor with access to information relevant for the audit and access to staff within the entity.

What must auditors determine with regards to the financial reporting framework, according to ISA 210?

Determine whether the financial reporting framework to be applied in the preparation of the financial statements is acceptable.

What must an auditor do if the preconditions of audit are not met?

If the preconditions are not present, the auditor should discuss the matter with management, and should not accept the engagement unless required to do so by law or regulation - ISA 210

When should the engagement letter be signed?

BEFORE any work has started

What is the purpose of an engagement letter?

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

What are the 4 main contents of an engagement letter?

1. Objective and scope

2. Responsibilities (management and auditor)

3. Auditor’s right to access records, documents and information required during audit

4. Form and content of reports/ communications on audit

What are the 4 additional contents of an engagement letter?

1. Basis of fees

2. Practicalities

3. Need for a written representation letter

4. Audit timetable

Is there a requirement for a new engagement letter on recurring audits?

For recurring audits there is no standard requirement that a new engagement letter is sent every year.

Instead, the auditor should consider whether a new engagement letter is required.

This is likely to be necessary where there are changes in the terms of engagement or changes in the board of directors, or if there’s a need to remind the client of their responsibilities

What is the DUTY of an outgoing auditor when ordinary resolution is passed in a general meeting, according Companies Act 2006?

MUST do: Prepare and submit a statement of circumstances to the company’s registered office (a statement of matters to be brought to the attention of shareholders or creditors, or a statement that there are no such circumstances)

^ When company is listed, there are stricter requirements

What are the RIGHTS of an outgoing auditor when ordinary resolution is passed in a general meeting, according Companies Act 2006?

MAY do: Prepare written representations 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.

What is the DUTY of an outgoing auditor to submit written notice to company’s registered office, according Companies Act 2006?

MUST do: Prepare and submit a statement of circumstances to the company’s registered office (a statement of matters to be brought to the attention of shareholders or creditors, or a statement that there are no such circumstances)

What are the RIGHTS of an outgoing auditor to submit written notice to company’s registered office, according Companies Act 2006?

Prepare written representations to be circulated to the members of the company.

Request, attend and speak at an extraordinary general meeting (EGM) which can be called at short notice.

What can't a statement of circumstances not do?

The statement of circumstances cannot just state that there are no circumstances to be brought to the attention of shareholders or creditors.

This makes it difficult for an auditor who thinks something is wrong at a listed company, but is not sure, to walk away without providing an explanation to the members

What 6 things MUST an engagement letter include?

1. Objectives of work/auditor’s responsibilities

2. Management’s responsibilities

3. Scope of work

4. Form of any reports

5. Level of access to books and records

6. Reporting framework

What 6 things MAY an engagement letter include?

1. Inherent limitations of the engagement

2. Expectation re: written management representations

3. Confidentiality/restricted circulation/ use of report

4. Arrangements re: reliance on internal audit

5. Restrictions on auditor’s liability (if possible)

6. Basis of fee calculations