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CHAPTER 2 Process of assurance: obtaining an engagement Introduction Examination context Topic List 1 Obtaining an engagement 2 Accepting an engagement 3. Agreeing terms of an engagement Summary and Self-test Technical reference Answers to Interactive questions Answers to Seli-test Introduction Learning objectives Tick of * Be aware of how assurance firms obtain work oO « Understand the key issues practitioners must consider before accepting engagements in « Know what a letter of engagement is and what it does O The specific syllabus reference for this chapter is: 1f. Syllabus links The issues of obtaining engagements will be looked at in much greater delail in the Audit and Assurance paper at the Application level. Examination context This is a fairly minor area for the exam, but you could expect at least one question on the scope of the engagement (there was a question about engagement letters in the sample paper) and possibly another on the considerations of the assurance firm when deciding to accept engagements. In the assessment, candidates may be required to: . Identify acceptance procedures « — {dentify sources of information about new clients « Select procedures required by money laundering legislation * Determine the purpose of a letter of engagement | | seven The nominee auditors must carry out the following procedures. Acceptance procedures Ensure professionally qualified to act Consider whether disqualified on legal or ethical grounds, for example if there would be a conflict of interest with another client. We will look in more detail at ethical issues later in this Study Manual. Ensure existing resources adequate Consider available time, staff and technical expertise. Obtain references Make independent enquiries if directors not personally known. Communicate with present auditors 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 those managing a company will be of great importance. particularly if the company is controlled by one or a few dominant personalities. The audit firm will also 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 that client. The following table contrasts low and high risk clients. Good long-term prospects Poor recent or forecast performance Well-financed Likely lack of finance Strong internal controls Significant control weaknesses ; Conservative, prudent accounting policies 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 Where the risk level of a company's audit is determined as anything other than low, then the specific risks should be identified and dacurnented. It might be necessary to assign specialists in response to these risks, particularly industry specialists, as independent reviewers. Some audit firms have procedures for closely monitoring audits which have been accepted, but which are considered high risk. Generally, the expected fees from a new client should reflect the level of risk expected. They should also offer the same sort of return expected of clients of this nature and reflect the overail financial strategy of the audit firm. Occasionally, the audit firm will want the work to gain entry into the client's particular industry, or to establish better contacts within that industry. These factors will all contribute to a total expected economic return. The audit firm will generally want the relationship with a client to be long term. This is not only to enjoy receiving fees year after year: it is also to allow the audit work ta be enhanced by better knowledge of the client and thereby offer a better service. Conflict of interest problems can be significant; the firm should establish that no existing clients will cause difficulties as competitors of the new client. Other services to other clients may have an impact here, not just audit. The audit firm must have the resources to perform the work properly, as well as any specialist knowledge or skills, The impact on existing engagements must be estimated, in terms of staff time and the timing of the audit. Sources of information about new clients Enquiries of other sources Bankers, solicitors Review of documents Most recent annual accounts, listing particulars, credit rating Previous accountants/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 Prospective auditors should seek the prospective client's permission to contact the previous auditors. If this c permission is not given, the prospective auditors should normally decline the appointment. Normally permission H will be given, so the prospective auditors can write to the outgoing auditors. A P Worked example: Initial communication T This is an example of an initial communication a To: Retiring & Co Chartered Accountants 2 Dear Sirs Re: New Client Co Ltd We have been asked to allow aur name to go forward for nomination as auditors of the above company, and | we should therefore be grateful if you would please fet us know whether there are any professional reasons | why we should not accept nomination ...... . i i ' | Acquiring & Co | Chartered Accountants Having negotiated these steps the auditors will be in a pasition to accept the nomination, or not, as the case 2.2 Interactive question 1: Accepting appointment [Difficulty level: Easy} Identify whether the following are true or faise. The audit firm should consider the following factors when determining whether to accept an engagement. Whether the firm is ethically barred from acting. . Whether the firm has sufficient resources to carry out the engagement. Whether the firm can make sufficient profit from the engagement. Whether the client is new to the firm. Whether the client gives permission to contact the outgoing auditors See Answer at the end of this chapter. AMAY>Y IO The following procedures should be carried out after accepting nomination. * Ensure that the outgoing auditors’ removal or resignation has been properly conducted in accordance with national jegislation. 2 The new auditors should see a valid notice of the outgoing auditors’ resignation, or confirm that the outgoing auditors were properly removed. + Ensure that the new auditors’ appointment is valid. The new auditors should obtain a copy of the resolution passed at the general meeting appointing them as the company’s auditors. « — Set up and submit a letter of engagement to the directors of the company, Where the outgoing auditors have fees still owing by the client, the new auditors need not decline appointment solely for this reason. Once a new appointment has taken place, the new auditors should obtain all books and papers which belong to the client from the outgoing auditors. The outgoing auditors should ensure that ail such documents are transferred promptly, unless they have a lien (a legal right to hold on to them) because of unpaid fees. An outgoing auditor cannot have a lien over the accounting records of a registered company as the Companies Act requires these to be available for public inspection. The outgoing auditors should also pass. any useful information to the new auditors if it will be of help, without charge, unless a lot of work is involved Other assurance engagements Similar considerations will be required for any assurance engagements. The legal considerations relating ta audit will not be relevant to other assurance engagements, but the ethical, risk and practical considerations will be just as valid. Interactive question 2: Client due diligence [Difficulty level: Easy] Drew Brothers, chartered accountants, has recently accepted appointment as the auditor of Abysin Ltd. In terms of client due diligence, they should check which two of the foliowing documents? LG Certificate of incorporation LE] Passport L| Utilities bills Annual return See Answer at the end of this chapter. Proceso assrece: bling an engagomen fs | 3 Agreeing terms of an engagement Section overview. * ° ‘An-éhgagement letter should be sent to’all clients to-cletify the terms ofthe engagement. «°° Agreement of audit epgagement terttis mist be.in writing, " “" eschilt must include anexplariatioh ofthe scope-of the: alidit, the limitations of an audit and the responsibilities of auditérs.and those charged with goverfiance. : «© Itmay‘contaiti other information congerning practical details ofthe. ‘audit. The purpose of an engagement letter is to: « Define clearly the extent of the firm's responsibilities and so minimise the possibility of any misunderstanding between the client and the firm » Provide written confirmation of the firm’s acceptance of the appointment, the scope of the engagement and the form of their report If an engagement letter is not sent to clients, both new and existing, there is scope for argument about the precise extent of the respective obligations of the client and its directors and the auditors. The elements of an engagement letter should be discussed and agreed with management before it is sent. An engagement letter for any type of assurance engagement will contain the same contents as an audit engagement letter (discussed below). Clearly details will be different (for instance, it will cover the scope of the engagement, but the scope of an audit and the scope of a review of forecast information, for example, will be different}. An engagement letter for an assurance engagement other than audit is likely to refer to specific fees for the engagement. As you will see below, as an audit engagement is often recurring, specific fees are initially not mentioned. 3.1 Audit engagement letters ISA 210 Agreeing the terms of audit engagements requires that the auditor and the client agree on the terms of the engagement. The agreed terms must be in writing and the usual form would be a letter of engagement. Any other form of appropriate contract, however, may be used. Even in countries where the audit objectives and scope and the auditor's obligations are established by law, an audit engagement letter may be informative for clients. The auditors should send an engagement letter to all new clients soon after their appointment as auditors. and, in any event, before the commencement of the first audit assignment. They should also consider sending an engagement letter to existing clients to whom no letter has previously been sent as soon as @ suitable opportunity presents itself. The following items shalt be included in the engagement letter. «The objective of the audit of financial statements. « The scope of the audit, which could include reference to applicable ‘egislation, regulations, or pronouncements of professional bodies to which the auditor adheres. * The auditor’s responsibility. «The reporting framework that is applicable for the financial statements being prepared, for example International Financial Reporting Standards. * Management's responsibility to prepare the financial statements and to provide the auditor with unrestricted access to whatever records, documentation and other information is requested in connection with the audit. « — The form of any reports of results of the engagement. The form and remaining content of audit engagement letters may vary for each client, but the auditor may wish to include in the letter the following items. || “ven Worked example: Audit engagement letter (extract) To the Board of Directors of ABC Company i Acting As Auditors Under The Companies Act 1994 | Responsibilities And Scope For Audit Services i Your responsibilities as directors 1 AS directors of the company, you are responsible for preparing financial statements which give a true and fair view and which have been prepared in accordance with the Companies Act 1994 (the Act). As directors you must not approve the financial statements unless you are satisfied that they give a true and fair view of the assets, liabilities, financial position and profit or loss of the company. in preparing the financial statements, you are required to: Oo select suitable accounting policies and then apply them consistently; Oo make judgements and estimates that are reasonable and prudent; and Ol prepare the financial statements on the going concem basis unless it is inappropriate ta presume that | the company will continue in business. You are responsible for keeping adequate accounting records that set out with reasonable accuracy at any time the company's financial position, and for ensuring that the financial statements comply with International Financial Reporting Standards (IFRSs) as adopted by the {CAB and with the Companies Act 1994 and give a f true and fair view. You are also responsible for such internal control as you determine is necessary to enable the preparation of financial statements that are free from material misstatement whether due to fraud or error. You are also responsible for safeguarding the assets of the company and hence for taking reasonable steps to prevent and detect fraud and other irregularities. You are responsible for ensuring that the company complies with laws and reguiations that apply to its activities, and for preventing non-compliance and detecting any that occurs. You have undertaken to make available to us, as and when required, all the company’s accounting records and i related financial information, including minutes of management and shareholders’ meetings. that we need to do our work. You have also undertaken to provide us with unrestricted access to any persons fram whom we deem it necessary to obtain audit evidence. Each director is required to take all steps that he ought to take as a director in order to make himself aware of any relevant audit information and to establish that we are aware of that information Our responsibilities as auditor We have a statutory responsibility to report to the members as a body, whether in our opinion the financial statements have been properly prepared in accordance with IFRSs, whether they have been prepared in accordance with the Companies Act 1994 and whether they give a true and fair view. We are also required to | report whether the information given in the directors’ report is consistent with the financial statements. In } arriving at our opinion, we are required to consider the following matters, and report on any that we are not satisfied with: (a) whether the company has kept adequate accounting records, and whether branches that we have not i visited have sent in returns adequate for our audit; H (b) whether the company’s individual accounts are in agreement with the accounting records and returns; | and | | (c) whether we have obtained all the information and explanations which we consider necessary for the | purposes of our audit. i | We may also need to deal with certain other matters in our report. If the company prepares accounts and ! | reports in accordance with the small companies regime when in our opinion it is not entitled to do so we are | required to state that fact in our report. i We have a professional responsibility to report if the financial statements do not significantly comply with i applicable financial reporting standards, unless we believe there is a good reason for the non-compliance. In } deciding whether or not this is the case, we consider: i (a) whether the non-compliance is necessary for the financial statements to give a true and fair view, and (b) whether the non-compliance has been clearly disclosed. | | a i We also have a professional responsibility to consider whether other information in documents containing i ; audited financial statements is consistent with those financial statements. | Scope of audit i ; We will carry aut our audit in accordance with the International Standards of Auditing adopted by ICAB. Those | Standards require that we comply with ethical requirements and pian and perform the audit to obtain | reasonable assurance about whether the financial statements are free of material misstatements. An audit | involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial i i statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. An audit also includes ; evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates : made by management, as well as evaluating the overall presentation of the financial statements. Because of | i; the test nature and other inherent limitations of an audit, together with the inherent limitations of any accounting | and internal control system, there is an unavoidable risk that even some material misstatements may remain | undiscovered We shall obtain an understanding of the accounting and internal control systems in order to assess their | : adequacy as a basis for the preparation of the financial statements and to establish whether adequate i | accounting records have been maintained by the company. We shail expect to obtain such appropriate evidence as we consider sufficient to enable us to draw reasonable conclusions there from. In addition to our report on the financial statements, we will provide you with a separate letter concerning any significant | deficiencies in accounting and internal control systems which come to our notice. i The nature and extent of our audit will vary according to our assessment of ithe company’s accounting system | and, where we wish to rely on it the internal control system, and may cover any aspect of the business’s | operations that we consider appropriate. Our audit is not designed to identify all significant deficiencies in the company’s systems and internal controls but, if we detect significant deficiencies we will report them to you in : writing, H As part of our normal audit procecures, we may ask you to confirm in writing representations you have made to : us during the audit. in particular, where misstatements in the financial statements that we bring to your : attention are not adjusted, you must state your reasons. In connection with representations and the supply of | information to us generally. we draw your attention to section 334, 335 of the Companies Act 1994 under which it is an offence for anyone to recklessly or knowingly supply information to the auditors that is false or misleading and to fail to promptly provide information requested, To help us examine your financiai statements, we will ask to see all documents or statements that are due to be issued with the financial statements. We are also entitled to receive details of all written resolutions that are to be circulated to members, to attend ail the company's general meetings and to receive notice of them all You are responsible for safeguarding the company's assets and for Preventing and detecting fraud, error and | non-compliance with law or regulations. We will plan our audit so that we can reasonably expect to detec: significant misstatements in the financial statements or accounting records (including those resulting from fraud, error or non-compliance with law or regulations), but you cannot rely on us finding all such errors, In respect of the expected form and content of our report, we refer you to the most recent builetin on auditors’ reports published by the Institute of Chartered Accountants of Bangladesh. The form and content of our report may need to be amended in the light of our findings. Once we have issued our report, we have no further responsibility in relation to the financial statements for that financial year. However, we expect that you will inform us of any material event occurring between the date of our report and the date the financial statements are sent out in accordance with IAS 10 which may affect the ; financial statements. We look forward to full cooperation from your staff during our audit. i [Other relevant information] | iInsert other information, such as fee arrangements, billings and other specific terms, as appropriate. ] wv AMAY> IO XYZ & Co, . Acknowledged and agreed on behalf of ABC Company by Name and Title a Process of assurance: bing an engagement faa Summary and Self-test Summary Auditors may advertise their Auditors will often be invited to services, within certain tender for audits boundaries When an audit firm is invited to accept an engagement {usually as a result of a successful tender), it must: Consider whether it ig ethically barred from acting Consider whether it has the resources available to undertake the engagement Obtain permission to contact the outgoing auditors, and so do When an audit firm accepts an engagement it must: Check the outgoing auditors’ removal was carried out properly Ensure its appointment is valid Carry out customer due diligence in accordance with Money Laundering Regulations 2007 Set up Letter of engagement Must be sent prior to first audit Clarifies terms of engagement Process of assurance: baring an engagamen Self-test Answer the following questions. 1 Anaudit firm must not accept an engagement if the client is not previously known to them. EJ True EJ False 2 Ifa prospective client declines permission to contact the previous auditors, the audit firm should: A Report the client to the Companies Registrar B Contact the previous auditors anyway C Accept the engagement provisionally and continue to request permission D Normally decline the appointment 3 Complete the questions that should be in the diagram. Approach by new aud client Ne need to follow Yes professional rules — the —_ __»] auditor can make own decision No No Yes Write for afl information Prospective auditer pertinent co che should normally decline appointment the appeinement Ne Yes Give old audkor due notice then decide on basis of knowledge obtained otherwise | *| “enn Technical reference 1 Accepting an engagement Section 210 to 218 of Companies Act 2 Agreeing terms of an engagement « — Agree the terms in writing [SB 2 * Send letter before first audit A 219.082 « Contents of engagement letter ISA 270 10, Aga Answers to Interactive questions Answer to Interactive question 1 The auditors should consider all these factors except whether the client is new to the firm. This is irrelevant in making the decision, although the firm may have to carry out additional procedures to get to know the client if tt is a new client. The auditors must consider if they are ethically qualified to act, whether they have sufficient resources and whether the client gives permission to contact the previous auditors (if this is declined, the auditors must consider carefully the reasons for the refusal). As the audit firm is also a commercial enterprise, it must consider whether taking on the engagement is commercially viable. Answer to Interactive question 2 They should check the certificate of incorporation and the annual return (which should give details of the registered office and the shareholders and directors), AMAV> IO Answer to Interactive question 3 The specific staff assigned to the engagement will not normally be referred to (as the auditors will reserve the right to change their arrangement and the client should not have influence over assurance staff anyway). The composition of the audit team may be referred to, for example the number of senior and junior staff in the team. The other three items may be included. p Process of asurance: bling an engagement 
