Syllabus C3: Professional appointments

Syllabus C3a) Explain the matters to be considered and the procedures that an audit
firm/professional accountant should carry out before accepting a specified new client/
engagement or continuing with an existing engagement, including:
. i) client acceptance
. ii) engagement acceptance
. iii) establish whether the preconditions for an audit are present
. iv) agreeing the terms of engagement.
Syllabus C3b) Recognise the key issues that underlie the agreement of the scope and
terms of an engagement with a client.
Accepting a new engagement
Auditors should screen clients to ensure they are not high risk
The risk to the auditor is ‘reputation risk’ i.e. that they will be associated with a poorly
regarded client.
An auditor is required under ISA 315 to gain an understanding of their client.
Auditors should screen clients to ensure they are not high risk
Questions to ask will be:
1. Is the client involved in any fraudulent/illegal activities?
2. What is the nature of the industry in which they are involved – is it depressed?
3. Has the client had a history of changing auditor regularly or had qualified audit
reports
in the past?
4. Do client directors understand their role and are they able to carry it out?
5. Are management trustworthy?
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Other Areas to help gain an understanding are:
• The market and its competition
• Legislation and regulation
• Regulatory framework
• Ownership of the entity
• Nature of products/services and markets
• Location of production facilities and factories
• Key customers and suppliers
• Capital investment activities
• Accounting policies and industry specific guidance
• Financing structure
• Significant changes in the entity on prior year
Auditors may advertise their services.
However, adverts should not bring the ACCA into disrepute, discredit the services of
others, be misleading, or fall short of regulatory or legislative requirements.
Procedures when offered a role
These include:
1. Get permission to contact the outgoing auditor
2. Contact the old auditor, asking for any reasons why we should not accept
appointment
3. Check we are sufficiently Independent
4. Check we have the competence & resources to do it
Pre-Conditions for an Audit
Auditors should only accept a new audit engagement when it has been confirmed that
the
preconditions for an audit are present..
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• Is the FR framework acceptable?
Consider the entity & the purpose of the FS
Perhaps, also, laws say which FR framework should be used
• Do Management accept their responsibilities?
For preparing FS
For internal controls
For giving the auditor all relevant information they request
If the preconditions for an audit are not present..
The auditor shall not accept the proposed audit engagement
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New engagement process
Tendering for audit work
Things to consider...
1. Fee
A fee will be quoted for a piece of audit work before it is carried out under a tendering
process
The auditor must not lowball as we have seen above, nor may they make unrealistic
claims or promises to win the contract
2. Get Information
The potential client will inform the auditor of what is expected, the timetable, future
plans of the company and any problems with current auditor
3. Proposal
The auditor may then draw up a proposal containing:
• Proposed audit fee
• Nature, purpose and legal requirements of an audit.
• Assessment of the requirements of the client.
• How audit firm proposes to satisfy requirements
• Any assumptions made.
• Proposed audit methodology.
• Outline of audit firm and personnel
• Ability of firm to perform the audit
Pre-conditions
Is the Financial framework used acceptable? (Consider the type of business and
relevant
laws and the uses of the financial statements)
Client Decision
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The client will decide on the basis of clarity, relevance, professionalism, reputation,
timeliness of delivery and originality which firm will conduct the audit
Engagement letter
An engagement letter is a letter from the auditor to the client indicating
various matters concerning the engagement
The engagement letter is sent before the audit to the client confirming their acceptance
of
the audit.
Contents
ISA 210 Terms of Engagement gives guidance as to their content, but as a rule most
will
include:
• The Objective of the audit.
• Managements’ responsibility for the Financial Statements.
• The scope of the audit including reference to legislation and professional standards.
• The form of report to be used
• Use of the work of internal audit
• Reference to inherent limitations of an audit
• Access to information to be allowed
• Deadlines and confidentiality
• Expectations of management representations
• Fees
• Complaints procedures
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