ARR C4 - Accepting and managing engagements

Acceptance and legal issues

Is it new client?

• lack of cumulative knowledge and experience increases detection risk

• Low comfort over opening balances

Why did previous auditor resign/not seek re-election? Why has client approached us?

Management integrity

• Is there any issues that cast doubt over this?

Auditor ethics

• Will engagement create any objectivity issues?

• Self interest threat due to fee income>

• Conflicts of interest with existing clients

Does firm have sufficient resources?

• If listed, does firm have access to an EQR?

• Can firm meet the deadlines?

• Does firm have access to any specialist resources required

Does firm have relevant knowledge and experience of industry and any relevant laws and regulations?

What is assessment of clients internal controls?

• links to management integrity?

Any reputational implications of being associated with this client?

Is firm able to gain professional clearance from outgoing auditor?

Professional clearance

ICAEW Code of Ethics requires firms to obtain professional clearance

To discover from previous auditor whether there are any reasons (ethical or professional) why firm should not take up prospect appoinment

Professional clearance steps

1. Obtain written permission from prospective client to contact existing auditor

2. Write to the outgoing auditor to obtain relevant information

3. Consider information received/lack of information received (silence taken to apply no adverse comments)

4. Take decision/inform client

Professional clearance for addition work / second opinion

Ensures second professional has all relevant information

Auditors should be wary of giving second opinion as can create ethical self interest threat to give opinion they want to hear to win work

Appointment of auditors

Auditor first needs to be appointed (and previous auditor removed) by ordinary resolution (>50% votes)

Members appoint auditor at AGM or other general meeting at which FS are put forward for approval by members

Appointment must be made by end of 28 days after last date on which account must be filed

If auditor is not appointed within this time, existing auditor is deemed to be reappointed

Removal of auditors responsibilities

Must write a statement of circumstances and deposit at company’s registered office explaining circumstances for their removal

If no circumstances ‘statement of no circumstances’

• listed companies must have statement of circumstances

REmoval of auditors rights

Right to receive notice, attend and speak at meeting appointing new auditor (AGM)

Right to have written representations circulated to all members, perhaps expalinin why they should not be removed

• prevents directors inappropriately putting auditors up for removal when they have a disagreement with them giving auditors right to argue their case

Resignation of auditors responsibilities

Must submit written notice to company’s registered office and submit a statement of circumstances explaning their resignation

If no circumstances ‘statement of no circumstances’

• listed companies must have statement of circumstances

Resignation of auditors rights

Right to request that directors convene a general meeting, allowing auditor to explain circumstances surrounding their decision

Right to require directors to circulate statement of circumstance in advance of the meeting

Pre conditions of an audit

Establish whether financial reporting framework applies is acceptable

Ensuring management understands its responsibilities (reduce expectations gap)

• To prepare FS

• To maintain system of control

• To provide information and access to auditors

If these conditions are NOT present, engagement should not be accepted

Letter of Engagement (ISA 210 para 10)

Objective and scope of audit of FS

• including reference to applicable legislation

• regulations

• financial reporting framework

• auditing standards

Managements responsibilities

• responsibility for FS

• Follow IFRS

• Implement sound system of internal controls

• Provide unrestricted access to records

Auditor responsibilities

• form of communications

• limitations of the audit

Identification of applicable financial reporting framework to FS

Reference to audit outputs to be produced by the auditor

Expectation that management will provide written representations

Letter of Engagement (ISA 210 para 10) may include

Practical matters

• planning

• using work of experts

• liaising with internal audit department

• fee

• restriction of auditor liability

Recurring audit

Not necessary to issue new letter each year

Auditor should consider every year whether new letter is required

Following factors may indicate new letter required:

• indications that the client misunderstands the terms of the engagement

• Revised terms of engagement

• A recent change in senior management/directors or in ownership of the company

• Legal or regulatory requirements

• A change in the financial reporting framework adopted in preparation of accounts