Sunday, March 13, 2016

Obtaining an Engagement

Class Synopsis on: Obtaining an Engagement
Assurance: Knowledge Level
Amin Siddiki FCA

Obtaining an Engagement
BSA 210: Agreeing the Terms of Audit Engagement

Appointment Considerations
·         Before a new client is accepted, the auditors must ensure that there are noindependence or other ethical issues likely to cause significant problems with the ethical code.
·         New auditors should ensure that they have been appointed in a proper and legal manner
Acceptance Procedures
·         Ensure professionally qualified to act
o   Consider whether disqualified on legal or ethical grounds, for example, if there would be a conflict of interest with another client
·         Ensure existing resources adequate
o   Consider available time, staff and technical expertise
·         Obtain references
o   Make independent enquiries if directors are not personally known.
·         Communicate with present auditors
o   Enquire whether there are reasons/circumstances behind the change which the new auditors ought to know, also as a matter of courtesy

Some of the basic factors for consideration are given below:
          The integrity of Management will be of great importance, particularly if the company is controlled by one or a few dominant personalities.
          The audit firm will consider whether the client is likely to be high or low risk to the firm in terms of being able to draw an appropriate assurance conclusion in relation to the client.
Table contrasts low and high risk clients:
Low Risk
High Risk
Good long-term prospects
Poor recent or forecast
Likely lack of finance
Strong internal controls
Significant control weaknesses
Conservative, prudent accounting policies
Competent, honest management
Evidence of questionable integrity, doubtful accounting policies
Competent, honest management
Lack of finance director
Few unusual transactions

Significant unexplained transactions or transactions with connected companies.
Sources of information about new clients
          Enquires of other sources
          Bankers, solicitor
          Review of documents
          Most recent annual accounts, credit rating
          Previous accounts/auditors
          Previous auditors should be invited to disclose fully all relevant information
          Review of rules and standards
          Consider specific laws/standards that relate to industry

Communication with previous/retiring auditors
Prospective auditors should seek the prospective client’s permission to contact the previous auditors.
If this permission is not given
The prospective auditors should considercarefully the reason for such refusal when determining whether or not to accept the appointment.
Normally permission will be given, so the prospective auditors can write to the outgoing auditors.
Example: Initial Communication with previous/retiring auditor
xx-xx- xxxx
ABC & Co
Chartered Accountants
Dear Sir
Ref: XYZ Ltd.
Professional Clearance
We have pleasure in informing you that we have been appointed as auditors of “XYZ Ltd.” for the year xx December 20xx. Since you were the previous auditors of the company, we would like to know from you if there is any professional reason as to why we should not accept the appointment.
XYZ & Co
Chartered Accountants

Procedures, after accepting nomination
  1. Ensure that the outgoing auditor’s removal or resignation has been properly conducted in accordance with national legislation.
                                               The new auditor should see a valid notice of the outgoing auditor’s resignation, or confirm that the outgoing auditors were properly removed.
  1. Ensure that the new auditor’s appointment is valid. The new auditor’s should obtain a copy of the resolution passed at the general meeting appointing them as the company’s auditors.
  2. Submit a letter of engagement to the directors of the company
Other Assurance Engagements
  1. The above considerations will be required for any assurance engagements.
  2. The legal considerations relating to audit will not be relevant to otherassurance engagements but the ethical, risk, and practical considerations will be just as valid
Engagement Letter
Auditing standards require that the auditor and the client should agree on the terms of the engagement. The agreed terms must be in writing and the usual form would be a letter of engagement.
The purpose of an engagement letter is to:
    1. Define clearly the extent of the firm’s responsibilities and so minimize the possibility of any misunderstanding between the client and the firm.
    2. Provide written confirmation of the firm’s acceptance of the appointment, the scope of the engagement and the form of their report.
Form & Content of an Audit Engagement Letter
The form and content audit engagement letters may vary for each client, but they would generally include reference to the following:
  1. The objective of the audit of financial statements.
  2. Management’s responsibility for the financial statements.
  3. The scope of the audit, including reference to applicable legislation, regulations or pronouncements of ICAB to whom the auditor adheres.
  4. The form of any reports or other communication of results of the engagement.
  5. The fact that because of the test nature and other inherent limitations of an audit, together with the inherent limitations of any accounting and internal control systems, there is an unavoidable risk that even some material misstatements  may remain undiscovered.
  6. Unrestricted access to whatever records, documentation and other information is requested in connection with the audit.
  7. The agreement of management to make available to the auditor draft financial statements and any accompanying other information in time to allow the auditor to complete the audit in accordance with the proposed timetable.
The auditor may wish to include in the letter the following items:
  1. Arrangements regarding the planning and performance of the audit, including the composition of the audit team.
  2. Expectation of receiving from management written confirmation of representations made in connection with the audit.
  3. A request for management to acknowledge receipt of the audit engagement letter and to agree to the terms of the engagement outlined therein.
  4. The agreement of management to inform the auditor of facts that may affect the financial statements, of which management may become aware during the period from the date of the auditor’s report to the date the financial statements are issued.
  5. Description of any other letters or reports the auditors expects to issue to the client.
  6. The confidentiality of any reports issued and if relevant, the terms under which they can be shared with third parties.
  7. The basis on which fees are computed and any billing arrangements.
When relevant, the following points could also be made in the audit engagement letter:
·         Arrangements concerning the involvement of other auditors and experts in some aspects of the audit.
·         Arrangements concerning the involvement of internal auditors and other staff of the entity.
·         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.

An example of an audit engagement letter is set out in the Appendix 1 of BSA 210.

Audit Engagement Letter for Recurring Audits
The auditor should consider whether circumstances require the terms of the engagement to be revised and whether there is a need to remind the client of the existing terms of the engagement.
The auditor may decide not to send a new audit engagement letter or other written agreement each period.
However, the following factors may make it appropriate to send a new letter to revise the terms of the audit engagement or to remind the entity of existing terms:
  1. Any indication that the entity misunderstands the objective and scope of the audit.
  2. Any revised or special terms of the audit engagement.
  3. A recent change of senior management.
  4. A significant change in ownership.
  5. A significant change in nature or size of the entity’s business.
  6. A change in legal or regulatory requirements.
  7. A change in the financial reporting framework adopted in the preparation of financial statements.
  8. A change in other reporting requirements

Thank You