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ACCEPTANCE OF AUDIT ENGAGEMENT

The following are the steps of a prospective auditor should take before deciding whether to accept or nothis/her nomination as the auditor:i)

Consider qualification for the appointment i.e. validly appointed as an auditor in accordance with theCompanies Act e.g. have attained the minimal qualification as identified in the first column of theAccounts Act:

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He is not a body corporate,

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He is not an officer or servant of the company, not a person who is a partner or in theemployment of an officer or servant of the company,

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He is not disqualified to be an auditor in a parent, subsidiary etc. Professional ethics do notblock him from being an auditor.ii)

Meet with the management and know exactly what the assignment involves to ascertain:

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The size, location and nature of his potential client and evaluate his ability to serve her/himin terms of resources.

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The number, qualification and experience of the personnel to be used in such audit.

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To know the timing of the audit i.e. the year end of his potential client and the time thereport is required not to delay. AGM.

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The current commitment of the firm e.g. the listing of the firm in the stock exchange,mergers, acquisition etc to enable the auditor to assess his liability.iii)

Request the client to give permission to communicate with the retiring auditor to find out whether thereare reasons professional or otherwise as to why he should not accept the appointment such as:

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Reason for his removal

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Integrity of the management and their management styles e.g. centralized, decentralized,democratic etc.

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Areas of potential risk to put more emphasis while auditing

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Nature of the internal control systems to know whether they can be relied upon.NB: Depending on the assessment of the potential client, the auditor can decide to accept or reject theappointment.Once the auditor has accepted the appointment, he should communicate this to the client through a letterof engagement.

Legal liabilities of auditors

Auditors are supposed to perform their work in an honest and careful manner since they can be held liablefor negligence in the following ways:a)

They don’t carry out their work as required by the ISAb)

They fail in the duty of protecting the interest of the various users of the financial statements i.e.any person who relies on his work.c)

They don’t carry out their work with due care and skill i.e. what an ordinary skilled man or womanwould do in that circumstance.N.B. The auditor’s liability falls under three categories:i)

To their clients (company itself)ii)

To third parties in case of negligenceiii)

Civil and criminal liabilities

CIVIL LIABILITY UNDER THE STATUTE

All auditors can be sued in a civil court when they have breached their position of trust e.g. if an auditoruses information acquired during the course of the audit to make financial gain , then in such a case he orshe can be sued for breaching his position of trust and confidentiality.

CRIMINAL LIABILITY UNDER THE STATUTE

Section 46 of the Companies Act provide that an auditor shall be criminally liable if he willingly makes amaterial false statement in any report, certification or in the financial statement with the intention todeceive and mislead. Examples of criminal liabilities include:i)

The auditor accepts appointment when he is ineligible to do so or continue in office after becomingineligible.ii)

The auditor obtains the advantage of deception.iii)

The auditor falsifies accounting records or documents.iv)

When the auditor publishes misleading statements intended to deceive members.v)

When an auditor misappropriates a clients’ property.vi)

When the auditor destroys, defaces or conceals any account record or document made or required forany accounting purpose.

LIABILITY UNDER THE LAW OF CONTRACT

There is a contractual relationship between the auditor and his client .Under this contract it is implied thatthe auditor will carry out the work with a reasonable degree of skill and care. The degree of care and skillrequired will mainly depend on the nature of work undertaken. Generally if the auditor has complied withISA it is difficult to prove that he was negligent. In the absence of suspicious circumstances the auditor willnot be liable for failing to uncover fraud and error which could not be discovered by exercise of normalskill and care. The auditor can be accused of negligence if:

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He fails to detect fraud or error that he could have reasonably detected i.e. material misstatement

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He fails to comply with the Generally Accepted Auditing Standards (GAAS) and practices e.g.attending stock take, circularizing debtors, writing to the bank etc.NB: For the client to succeed in a claim for financial loss he must satisfy the court in relation to threematters:i)

That there existed a duty of care enforceable by the lawii)

That where the duty existed the auditor was negligent in the performance of that duty judged byacceptable professional standardsiii)

That the client suffered some financial loss as a direct consequence of the auditor’s negligence.