Obtaining an Engagement

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

Obtaining an Engagement

Ref:

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
Well-financed	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.

2. 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.
3. 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

Concept & Need For Assurance

Concept & Need for Assurance

Assurance services are (1) independent (2) professional services that (3) improve the quality of information, or its context, (4) for decision makers.

            Assurance services include many areas of information, including nonfinancial areas.

Why?

Ø  Increase confidence

Ø  Reduce Risk

•          Assurance

•          An assurance engagement is one in which a practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement of a subject matter against criteria.

Elements Assurance Engagement

•          The key elements of an assurance engagement

•          Three Party Relationship

•          A subject matter

•          Suitable Criteria

•          Sufficient Appropriate Evidence to Support the Assurance Opinion

•          A Written Report

•          Three Party Relationship

·         The practitioner (accountant  i.e. auditor)

·         The intended users (stakeholders)

·         The responsible party (the person(s) who prepared the subject matter i.e. the management)

Stakeholders of a company

Ø  The stakeholders of a company are all those who are influenced by, or can influence, the company’s decisions and action. The stakeholder group are:

o   Shareholders

o   Lenders

o   Investors

o   Customer

o   Employee

o   Government and their Agent

o   Public at large

Ø  Subject Matter

o   Data (for example, financial statements or business projections)

o   Systems or processes (for example, internal control systems or computer systems)

o   Behavior (for example, social and environmental performance or corporate governance)

Ø  Suitable Criteria

o   The person providing the assurance must have something by which to judge whether the information is reliable and can be trusted. So for example, in an assurance engagement relating to financial statements, the criteria might be accounting standards(e.g. BAS). The practitioner will be able to test whether the financial statements have been put together in accordance with accounting standards and if they have, then the practitioner can conclude that there is a degree of assurance that they are reliable.

Ø  Sufficient appropriate evidence to support the assurance opinion

o   The practitioner must substantiate the opinion that he draws in order that the user can have confidence that it is reliable. The practitioner must obtain evidence as to whether the criteria have been met.

Ø  A written report in appropriate form

o   Lastly, it is required that assurance reports are provided to the intended users in a written form and contain certain specified information. This adds to the assurance that the user is being given, as it ensures that key information is being given and that the assurance given is clear and unequivocal.

Level of  Assurance

Level of Assurance

Ø  Reasonable Assurance Engagement

Ø  Limited Assurance Engagement

Ø     Reasonable Assurance Engagement

o     A high, but not absolute level of assurance

o     In audit engagement, the auditor (practitioner) provides a high, but not absolute, level of assurance that the information subject to audit is free of material misstatement. This is expressed positively in the audit report as reasonable assurance.

Ø    Limited Assurance Engagement

•          A Moderate level of assurance

•          In a review engagement, the auditor (practitioner) provides a moderate level of assurance that the information subject to review is free of material misstatement. This is expressed in the form of negative assurance.

Ø     Key differences between the two types of assurance are:

o   The evidence obtained

o   The type of opinion given

Ø    Say, for example, that a practitioner is seeking evidence to conclude whether the report issued by the Chairman of a company in the financial statements is reasonable or not. He could seek evidence, conclude that the statement is reasonable and state in a report something like this:

“In my opinion, the statement by the Chairman  regarding X is reasonable.”

This is a positive statement of his conclusion that the statement is reasonable.

Alternatively, he could state in a report something like this:

“In the course of my seeking evidence about the statement by the Chairman, nothing has come to my attention indicating that the statement is not reasonable.”

This is a negative statement of his conclusion that the statement is reasonable.

Standards for specific engagements usually performed by CA firms

Ø  International Standards on Auditing (ISAs) -100-999

ISAs are to be applied in the audit of historical financial information. (Reasonable Assurance)

Ø  International Standards on Review Engagements (ISREs)- 2000-2699

ISREs are to be applied in the review of historical financial information. (Limited Assurance)

Ø  International Standards on Assurance Engagements (ISAEs)- 3000-3699

ISAEs are to be applied in assurance engagements other than audits or reviews of historical financial information.

Ø  International Standards on Related Services (ISRSs) - 4000-4699 

ISRSs are to be applied to compilation engagements, engagements to apply agreed-upon procedures to information, and other related services engagements as specified by the IAASB. (NO Assurance)

Audit Engagement

A friend of yours, an investor in the DSE, has just received the annual financial report of  KL Company Ltd. a listed company.

He made the following comment:

“I see the auditors have issued a clear report on the company. I can therefore invest a further amount of money into the company, as there will be no risk that I will lose my money owing to mismanagement”

Some thoughts

¨  Audit enhances credibility.

¨  Will not guarantee future viability.

¨  Does not guarantee efficiency and effectiveness.

¨  Gives reasonable but not absolute assurance.

¨  Inherent limitations in audit could affect auditor’s ability to detect fraud.

¨  Audit work open to subjective judgement.

Objective:

The objective of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework.

•          The key elements of an assurance engagement

•          Three Party Relationship

•          The shareholders (users)

•          The board of directors (the responsible party)

•          The audit firm (the practitioner)

•          A subject matter

•          The financial statements

•          Suitable Criteria

•          Law and accounting standards

•          Sufficient Appropriate Evidence to Support the Assurance Opinion

•          Audit evidence

•          A Written Report

•          An assurance report issued in a prescribed form.

True and Fair View

•          True

•          Information is factual and conforms with reality, not false. In addition the information conforms with required standards and law. The accounts have been correctly extracted from the books and records.

•          Fair

•          Information is free from discrimination and bias in compliance with expected standards and rules. The accounts should reflect the commercial substance of the company’s underlying transactions.

•          Legal and Professional Requirements of Auditors in Bangladesh

•          The legal requirements are currently contained in Companies Act 1994.

•          The Companies Act 1994 requires that the auditors must be a member of the Institute of Chartered Accountants of Bangladesh (ICAB)

The Companies Act 1994 also sets out factors which make a person ineligible for being a company auditor, for example, if he or she is:

a.       an officer or employee of the company;

b.      a person who is a partner or who is in the employment of  an officer or employee of the company;

c.       a person who is indebted to the company exceeding Taka 1,000;

d.      a person who is a director or member of a partner company, or a partner of a firm, which is the managing agent of the company;

e.       a person who is a director, or the holder of shares exceeding 5% in nominal value of the subscribed capital.

Relevant provisions of Companies Act 1994 regarding Audit Issues

§  U/S 210: Appointment and remuneration of auditors

§  U/S 211: Provisions as to resolutions for appointing or removing auditors

§  U/S 212: Qualification and disqualification of auditors

§  U/S 213: Power and duties of auditors

§  U/S 214: Audit of accounts of branch office of company

§  U/S 215: Signature of audit report, etc.

§  U/S 217: Right of auditor to attend general meeting

Professional   Requirements

The Principles are

1.      Integrity

2.      Objectivity

3.      Professional Competence and Due Care

4.      Confidentiality

5.      Professional Behavior

Benefits of Assurance

Key Benefit

The independent, professional verification being given to the users.

Subsidiary  benefits

Additional Confidence: It may give additional confidence to other parties in a way that benefits to the business.

Reduce risk: The existence of an independent check might help prevent errors or frauds being made and reduce the risk of management bias. Therefore, it can be seen that an assurance service may act as a deterrent.

Users Attention :Where problems exist within information, the existence of an assurance report draws attention to the deficiencies in that information, so that users know what those deficiencies are.

Quality of Information:  Assurance helps to ensure that high quality, reliable information exists, leading to effective markets that investors have faith in and trust.

Why can assurance never be absolute?

Assurance providers will never give a certificate of absolute correctness due to limitations of assurance services.

Limitations of assurance services.

1.      The fact that testing is used-the auditors do not oversee the process of building the financial statements from start to finish.

2.      The fact that the accounting and internal control systems on which assurance providers may place a degree of reliance also have inherent limitations.

3.      The fact that most audit evidence is persuasive rather than conclusive.

4.      The fact that assurance providers would not test every item of in the subject matter (a sampling approach is used).

5.      The fact that the client’s staff members collude in fraud that can then be deliberately hidden from the auditor or misrepresent matters to them for the same purpose.

6.      The fact that assurance provision can be subjective and professional judgments have to be made (for example, about what aspects of the subject matter are the most important, how much evidence to obtain etc.).

7.      The fact that assurance providers rely on the responsible party and its staff to provide correct information, which in some cases may be impossible to verify by other means.

8.      The fact that some items in the subject matter may be estimates and therefore uncertain. It is impossible to conclude absolutely that judgmental estimates are correct.

9.      The fact that the nature of the assurance report might itself be limiting, as every judgment and conclusion the assurance has drawn cannot be included in it.

The Expectation Gap

The expectation gap means a gap between what the assurance providers understands he is doing and what the user of the information believes he is doing.

This is often because users are not aware of the nature of the limitations on assurance provisions, or do not understand them and believe that the assurance provider is offering a service (such as a guarantee of correctness) which is in fact he is not. The distinction between reasonable and limited assurance may also be misunderstood by users.

Assurance providers need to close this gap as far as possible in order to maintain the value of the assurance provided for the user. This is done in a variety of ways, for example, by issuing an engagement letter spelling out the work that will be carried out and the limitations of that work and by regularly reviewing the format and content of reports issued as a result of assurance work.

Thank You