CHAPTER 5
PROFESSIONAL APPOINTMENT
Steps Taken to Obtain a New Audit Engagement
The audit firm should perform audit on clients which are within the risk capacity of the
audit form
The firm will need to perform client screening where by matters are considered before
accepting a new engagement which are as follows:
Professional Clearance
• If offered an audit role, the prospective audit firm must:
• Ask the client for permission to contact the existing auditor (and refuse the
engagement if the client refuses).
• Contact the outgoing auditor, asking for all information relevant to the decision
whether or not to accept appointment (e.g. overdue fees, disagreements with
management, breaches of laws & regulations).
• If a reply is not received, the prospective auditor should try and contact the
outgoing auditor by other means e.g. by telephone.
• If a reply is still not received, the prospective auditor may still choose to accept
but must proceed with care.
• If a reply is received, consider the outgoing firm's response and assess if there
are any ethical or professional reasons why they should not accept
appointment.
• The existing auditor must ask the client for permission to respond to the
prospective auditor.
• If the client refuses permission, the existing auditor should notify the
prospective auditor of this fact.
Independence and objectivity
If the assurance provider is aware, prior to accepting an engagement, that the threats
to objectivity cannot be managed to an acceptable level, the engagement should not
be accepted.
Management integrity
If the firm has reason to believe the client lacks integrity there is a greater risk of fraud
and intimidation.
Money laundering (client due diligence)
The firm must comply with money laundering regulations which require client due
diligence to be carried out. If there is any suspicion of money laundering, or actual
money laundering committed by the prospective client, the firm cannot accept the
engagement.
Resources
The firm should consider whether there are adequate resources available at the time
the engagement is likely to take place to perform the work properly. If there is
insufficient time to conduct the work with the resources available the quality of the
work could be affected.
Risks
Any risks identified with the prospective client (e.g. poor performance, poor controls,
unusual transactions) should be considered. These risks can increase the level of
engagement risk, i.e. the risk of issuing an inappropriate report.
Fees
The firm should consider the acceptability of the fee. The fee should be commensurate
with the level of risk. In addition, the creditworthiness of the prospective client should
be considered as non-payment of fees can create a self-interest threat.
Professional competence
An engagement should only be accepted if the audit firm has the necessary skill and
experience to perform the work competently. Reputation of the client The audit firm
should consider the reputation of the client and whether its own reputation could be
damaged by association. If there are any reasons why the firm believes they may not
be able to issue an appropriate report, they should not accept the engagement.
Preconditions for an audit
Auditor should accept an agreement only if the preconditions of the audit exist. ISA
requires the auditors to:
• Determine whether the financial reporting framework used in the financial
statement is acceptable
• Obtain agreement from the management that it acknowledges and understand
its responsibility for the following;
- Preparing the FS in line with the financial reporting framework
- Internal controls are free from material misstatements
- Providing the auditor with access to information relevant for the audit and
access to staff
If the preconditions does not exist then the auditor should discuss the matter with the
management and should not accept the engagement unless required to do so or by
laws or regulations.
Engagement Letter
The engagement letter is a contract between the client and the audit firm which
specifies the nature of the contract. The purpose of the engagement letter is to
• Minimise the risk of any misunderstanding between the practitioner and client
• Confirm acceptance of the engagement
• Set out the terms and conditions of the engagement.
The engagement letter should be reviewed every year to ensure that it is up to date
but does not need to be reissued every year unless there are changes to the terms of
the engagement.
LOE is a very important document that sets out the relationship between the client and
the auditor, the nature of work and how disputes should be resolved The auditor should
issue a new engagement letter if the scope or context of the assignment changes after
initial appointment, or if there is a need to remind the client of the existing terms.
Reasons for changes would include:
• Changes to statutory duties due to new legislation
• Changes to professional duties, for example, due to new or updated ISAs
• Changes to other services as requested by the client.
LOE should be signed by the client and auditor prior to the commencement of the
audit.
Contents of the Engagement Letter
• The objective and scope of the audit of the financial statements
• The responsibilities of the auditor
• The responsibilities of management
• Identification of the applicable financial reporting framework for the preparation
of the financial statements
• Reference to the expected form and content of any reports to be issued by the
auditor
• Reference to professional standards, regulations and legislation applicable to
the audit
• Limitations of an audit
• Expectation that management will provide written representations
• Basis on which the fees are calculated
• Agreement of management to notify the auditor of subsequent events after the
auditor's report is signed
• Agreement of management to provide draft financial statements in time to allow
the audit to be completed by the deadline
• Form (and timing) of any other communication during the audit.
• Arrangements concerning the involvement of internal auditors and other staff
of the entity
• Limitations to the auditor’s liability.
Other matters may also be included in the LOE for clarification of the engagement.
If the terms of the audit engagement are changed, the auditor and management shall
agree on and record the new terms of the engagements in an engagement letter or
other suitable form of written agreement.
Audit of Component of a Group
Where the auditor of a parent Company is also the auditor of a subsidiary, branch or
division of the group, the audit firm must decide whether to issue a single engagement
letter covering all the components, or a separate letter to each component. If the audit
firm sends one letter relating to the group as a whole, it is recommended that the firm
should identify in the letter, the components of the group for which the firm is being
appointed as auditor.
Transfers to Clients
Transfer of books, papers and information to the client are dependent upon the
ownership of the aforementioned (generally relates to contractual agreement) Auditors
documentation belongs to the auditor not the client who has no right to that information.
Client papers however must be return to the client. The auditor may withhold the
papers until their fees are paid.
Practice Question
1: Your firm has been approached by Sax Co to provide the annual external audit
following the resignation of the previous auditor. The company’s year end is 31
December which is the same as the majority of your firm’s other audit clients. Sax Co
supplies goods to major retailers. Your firm does not audit any other retailers. The
company is currently recruiting a new finance director after the previous finance
director was found guilty of bribing customers in order to win major contracts.
Required: Explain the matters to be considered in deciding whether to accept he
appointment as auditor of Sax Co.
