Stage 1 – understanding the requirement

The first thing to do is to read and fully understand the question requirement. Here is
the requirement we will be looking at in this article:

‘Prepare a report, to be used by a partner in your firm, in which you identify and
evaluate the professional, ethical, and other issues raised in deciding whether to
accept the appointment as provider of an assurance opinion as requested by Petsupply
Co.’ (12 marks)

The requirement asks you to consider ‘professional, ethical, and other issues’. This
could cover a wide range of considerations, such as:

ethics: independence, competence, conflicts of interest, confidentiality, assessing

integrity

professional issues: the risk profile of the work requested, the fee – and whether it is
sufficient to compensate for high risk, availability of staff, managing client
expectations, logistical matters such as timing, legal and regulatory matters – such as
money laundering, and (in some cases) obtaining professional clearance other issues:
whether the work ‘fits’ with the commercial strategy of the audit firm, the potential
knock-on effect of taking on the work .

From reading the requirement, you know that the question scenario will be based on a
potential assurance assignment and will be broadly based around acceptance issues.

Stage 2 – reading the scenario

When reading through the detail of the scenario, you should now be alert to
information relevant to this requirement. Highlight important points that you think are
relevant to the scenario and remember to focus on issues that could affect your
acceptance of a potential assurance assignment.

Now read the following extract from the scenario and highlight the salient points –
remember to look out for any factors relevant to the ethical, professional, and other
issues described above.

Extract: You are a senior manager in Dyke & Co, a small firm of Chartered Certified
Accountants, which specialises in providing audits and financial statement reviews for
small to medium-sized companies. You are responsible for evaluating potential
assurance engagements, and for producing a brief report on each prospective piece of
work to be used by the partners in your firm when deciding whether to accept or
decline the engagement. Dyke & Co is keen to expand the assurance services offered,
as a replacement for revenue lost from the many small-company clients choosing not
to have a statutory audit in recent years. It is currently May 2007.

Petsupply Co has been an audit client of Dyke & Co for the past three years. The
company owns and operates a chain of retail outlets selling pet supplies. The finance
director of Petsupply Co recently communicated with your firm to enquire about the
provision of an assurance report on data provided in the Environmental Report
published on the company’s website. The following is an extract from the e-mail sent
to your firm from the finance director of Petsupply Co:

‘At the last board meeting, my fellow directors discussed the content of the
Environmental Report. They are keen to ensure that the data contained in the report is
credible, and they have asked whether your firm would be willing to provide some
kind of opinion verifying the disclosures made. Petsupply Co is strongly committed to
disclosing environmental data, and information gathered from our website indicates
that our customers are very interested in environmental matters. It is therefore
important to us that Petsupply Co reports positive information which should help to
retain existing customers, and to attract new customers. I am keen to hear your views
on this matter at your earliest convenience. We would like verification of the data as
soon as possible.’

You have looked at Petsupply Co’s Environmental Report on the company website,
and found a great deal of numerical data provided, some of which is shown below in
Table 1.

Table 1: Petsupply Co's environmental report – numerical data

Petsupply
Co: Actual Actual
environmenta KPI year KPI year Reason for
l key to 30 to 30 variance/tr
performance April April end
indicator 2007 2006
(KPI)/target

Petsupply
To spend Co has
$1m per more liquid
$1.1m $0.75m
annum on funds
spent on spent on
developing available in
relevant relevant
environmenta the year to
developm developm
lly-friendly 2007 to
ent ent
packaging spend on
and bags developme
nt projects

To increase 50 tonnes 25 tonnes Petsupply

the amount of of waste of waste Co has
waste recycled recycled doubled
recycled by the amount
10% per of waste
annum recycled
 Petsupply
Co: Actual Actual
environmenta KPI year KPI year Reason for
l key to 30 to 30 variance/tr
performance April April end
indicator 2007 2006
(KPI)/target

due to
installation
of
recycling
bins at all
stores

Customers
complete
surveys in
store to
To ensure
rate our
that at least
policies;
90% of our
data shows
customers are
95% 70% that
‘very happy’
‘very ‘very customers
with
happy’ happy’ are
Petsupply
extremely
Co’s
happy with
environmenta
our
l policies
progress on
environme
ntal
matters

Stage 3 – take time to think about the requirement and the scenario, you must take
time and not rush to answer. When evaluating this particular scenario try to think
widely about the information provided. Your answer should cover a broad range of
issues rather than concentrating on one or two. Your comments must be tailored to the
scenario. It is pointless, for example, to write about a general acceptance issue which
is not specifically related to Petsupply Co.

It is important to appreciate that few marks will be available for stating the issue. The
higher-level skill marks in this question will be awarded for a discussion of why the
issue is relevant to the decision about whether or not to provide the assurance service
to Petsupply Co. The requirement is to evaluate the scenario and therefore it is crucial
to demonstrate an appreciation that there may be two conflicting sides to the
discussion.
Table 2 shows an example of a thought process which identifies the issues and
explains why each issue is relevant to the requirement; the issues are shown in the
order in which they appear in the question.
Table 2: Example of a thought process which identifies issues and shows relevance to
the requirement
Issue from the scenario
Your firm is keen to provide
more assurance services due to
loss of income from audit
services
Petsupply Co has been a client
for three years
The assurance service
requested is to provide an
opinion on environmental key
performance indicators
Petsupply Co is keen to
disclose positive data in order
Why relevant to the requirement
The engagement will provide an extra source of revenue, and
accepting the assignment fits the commercial strategy of Dyke
& Co. But, the firm should not put the fact that it wants more
revenue from providing assurance services above the more
important consideration of ethical and professional issues, and
the overall assessment of the risk attached to the assignment. It
will also be important to consider whether the assignment is a
one-off engagement or is likely to be an ongoing service.
Your firm will already possess good business understanding,
which will reduce the risk associated with the engagement, and
should also cut down on planning time. However, Dyke & Co
must consider various ethical matters, as Petsupply Co is
already an audit client, including the appropriateness of
providing a non-audit service, and the impact on the level of
fees received from an existing client. It is irrelevant to discuss
whether there are general threats, such as financial interests in
Petsupply Co, as Dyke & Co already provides the audit
service, and should therefore already have conducted general
ethical clearance.
This appears to be a very specialist assignment and it is
questionable whether a small firm of accountants would
possess relevant skills and experience. However, the firm could
either spend time and money training staff to perform the
assignment, or bring in specialists to perform the work. This
would enable Dyke & Co to build up experience in this area,
enabling it to provide further services of this type, which fits in
with the firm’s commercial strategy. However, whether the
skills are developed in house, or bought in, there will be
considerable expense involved; Dyke & Co would need to
carefully consider the fee charged as the firm will want to
recover as much cost as possible.
There is a high inherent risk attached to the environmental
data. Petsupply Co has a clear reason to manipulate the data in
 Issue from the scenario
to maintain customer
satisfaction
Petsupply Co requires a
‘verification’ of the
environmental data
Petsupply Co wants the work
performed as quickly as
possible
Some of the data shown in the
environmental report is not
well defined
Report is internal, addressed to a partner, covering proposed assurance service for
existing audit client
Section 1 – ethical matters
Why relevant to the requirement
order to disclose that targets are being met. In deciding
whether to accept the assignment, Dyke & Co must consider
whether this risk can be reduced to an acceptable level. It may
be difficult for Dyke & Co to challenge the directors with
confidence about the data, given its lack of experience in this
area.
The client appears to have an unrealistic expectation of what an
assurance service can provide. Before any decision is made
about acceptance, Dyke & Co must explain to the client that its
report will not verify or certify the data, and is likely to provide
at best ‘limited assurance’ over the data – the expectation of
the client clearly needs to be managed.
As discussed above, Dyke & Co will need to either develop or
buy-in expertise in this area, and due to the high inherent risk
identified above, the firm will want to spend plenty of time
gathering evidence. The client again may have unrealistic
expectations about the timeframe in which the opinion could
be provided.
It would be relatively easy to gather evidence on the amount
spent on development, as this is similar to a substantive audit
procedure but it may be hard for Dyke & Co to substantiate if
the money has really been spent on environmentally-friendly
packaging.
Quantifying how much waste has been recycled will depend on
the strength of the system put in place by Petsupply Co to
capture the data. Equally, it would be difficult to gather
detailed evidence to reach an opinion on customer satisfaction
as it is a very subjective measure, not suitable for
quantification. All of the above points suggest that the
engagement will involve testing some subjective issues, and
possibly relying on the controls put in place by the client, both
of which have an impact on the overall risk assessment of the
work requested.
Provision of non-audit service

Impact on total fee from client

Competence to perform work – specialised engagement

Section 2 – risk-related matters

High inherent risk – figures prone to manipulation

Data highly subjective

Need to rely on systems put in place by client

Section 3 – commercial matters

Fee will have to be high enough to compensate for high risk

Fee may need to compensate for specialists if used

Strategic fit – assignment in line with commercial goals of Dyke & Co

Build up experience in non-audit service

Ascertain whether assignment will be recurring

Section 4 – other matters

Managing client expectation regarding type of opinion sought

Managing client expectation regarding timeframe