APPOINTMENT AND

PLANNING

1
 OBJECTIVES
• Why do companies change auditors?
• Acceptance procedures
• Engagement letters
• Stages in an audit
• Reasons for planning
• Planning procedures

2
CORPORATE GOVERNANCE
CODE
The audit committee should “review
and monitor the external auditor’s
independence and objectivity and the
effectiveness of the audit process,
taking into consideration relevant UK
professional and regulatory
requirements” (C.3.2).

3
COMPETITION COMMISSION
SURVEY FTSE350
• Average tenure is 11.3 years.
• 1/3 had used the same Big Four firm for
over 11 years.
• 14% had used the same firm for 20 years.

4
REASONS FOR NOT CHANGING
AUDITORS
• Time and cost

• Short term reduction in audit quality

• Perception of avoiding qualification

• Inertia and fear of change

5
TENDERING REQUIREMENTS
FTSE350 companies must put the audit out
to tender every 10 years

•Transitional provisions
•Comply or explain

6
 REASONS FOR CHANGING
AUDITORS
• Fees
• Audit quality
• Disputes
• Change of company ownership
• Present auditor too large/small
• Lack of independence
• Personality clash
• Fresh outlook
• Tender to judge current fees

7
 ACCEPTANCE
CONSIDERATIONS
• Competence

• Independence

• Integrity of management and owners

• Are preconditions for audit met?

8
 COMPETENCE
• Eligible under Companies Act

• Sufficient resources
– Size and location of client
– Experience and technical expertise
– Timing and current commitments of the firm

9
 CLIENT DESIRABILITY
Consider:
• The owners, directors & managers
• Nature of activities
• Abilities of client management
• Reason for change in auditor
• Any restrictions placed on audit
• Risks of the audit

10
PRECONDITIONS FOR AUDIT
• Management use an acceptable financial
reporting framework:
– IFRS
– UK GAAP
– FRSSE

• Management agree to the premise on

which an audit is conducted.

11
SOURCES OF INFORMATION
• Company documents e.g. last accounts
• Credit references
• Other advisors e.g. solicitors
• Personal or firm knowledge
• Press reports
• Other companies directors have been
involved with
• Existing auditor
12
 COMMUNICATION WITH
EXISTING AUDITOR
• Compulsory

• Matters to communicate
– Reasons for change
– Differences in principles or practice with client
management
– Unlawful acts
– Doubts about management integrity
– Deliberate withholding of information

• Decision rests with prospective auditor

13
 DECISION TO ACCEPT
Refuse if:
• Limitation of scope
• Unable to communicate freely with previous
auditor
• Client is not desirable

Accepted:
• Issue engagement letter
• Review decision at end of audit

14
 ENGAGEMENT LETTER
– Contract between auditor and client

– Discussed and agreed with client

– Remains in force until withdrawn

– See example for contents

For the exam you should be aware of the main contents, but
would not be expected to write an engagement letter
15
 STAGES OF AN AUDIT
• Planning

• Ascertain, record and confirm systems

• Identify controls and evaluate systems

• Audit testing
 Poor controls - Fully substantive
 Good controls - Tests of controls and reduced substantive testing

• Final review

• Report to shareholders and management letter

16
 WHY PLAN?
• Devote attention to important areas
• Identify and resolve problems on a timely basis.
• Audit is properly managed
– Resources
– Delegation, direction and supervision of work
– Co-ordination of others
• Maintaining standards
• Reduction of risk
• Negotiation on fees
17
 STAGES IN PLANNING
• Continuance procedures
• Understand entity and environment
• Overall audit strategy
• Detailed audit plan
• Documentation
• Communicate with client
• Update as necessary

18
 UNDERSTANDING THE
BUSINESS
Type of information
• Scale and size of the business
• Recent history and impact of the economy
• Products and markets
• Seasonal factors
• Customers and suppliers
• Sales and purchasing methods
• Competitors
• Financing arrangements
• Organisational structure
• Management motivation
19
 SOURCES OF INFORMATION
Auditor
• Prior audit files
• Other services
• Other clients in industry
• Technical department for industry specific guidance

Client
• Interim or management accounts
• Discussions
• Observation e.g. factory tour
• Manuals and sample documents
• Marketing literature and in-house publications

Third parties
• Company search
• Press and trade journals
• Trade associations
• Previous auditor

20
 OVERALL AUDIT STRATEGY
• Scope of the audit
• Reporting objectives of the company
• Focus of the audit

21
 SCOPE OF THE AUDIT
• Financial reporting framework and any industry specific
reporting requirements
• Any regulatory changes
• Number and locations of components
• Any going concern issues.
• Reliance on the work of internal auditors.
• Whether the company uses a service organisation
• Expected use of audit evidence obtained in prior
periods
• Effect of information technology
• Availability of client personnel and data

22
 REPORTING OBJECTIVES
• Company timetable
• Timing of interim and final audits
• Timing and type of reports to be issued
• Communication with third parties

23
 FOCUS OF THE AUDIT
• Set materiality and assess risk
• Reliance on internal controls
• Volume of transactions
• Significant business developments
• Select audit team
• Budget

24
 OTHER PLANNING
PROCEDURES
• Detailed audit plan

• Documentation

• Communication with the client

• Monitor and update plan as necessary

25