Agreeing on the terms of engagement – (ISA 210)

Once an auditor is nominated he has a choice of either accepting or rejecting the appointment.

Matters to consider and procedures to perform before accepting an appointment

1) Consider whether the audit fir has sufficient resources to service the client’s needs.
2) Ensure that you are disqualifiedon any legal grounds.
3) Check that there is no conflict of interest.
4) Check to ensure that no audit partner or audit staff has any blood relations with the officers of the client or shares in the client’s company.
5) Consider the technical capacity to do the work.
6) Consider availability of staff for work.
7) Consider the reporting deadline.
8) Consider the management’s integrity.
9) Consider the level of risk involved in the engagement.
10) Seek permission from the client to communicate with the predecessor auditor. If the permission is denied reject the appointment.
11) If the permission is granted request of the predecessor auditor of all the information that ought to be made known to you.
12) The predecessor auditor should first seek permission from the client to communicate with you freely about the client’s affairs, if permission is denied reject the appointment.
13) Indicate the provisional audit fee.
14) Find out why the previous auditors were removed.

Why it would be inappropriate to commence the audit before concluding on the procedures above.

1) It would be impractical to start with a few or incompetent staff as this will affect the efficiency of the audit and cause disagreement with the client.
2) Ethical matters and important to safeguard the auditors independence.
3) Ethical matters such as conflict of interest are important to avoid reprimand professional bodies.
4) To avoid negligence problems that may arise.
5) To avoid disagreement with the directors e.g. on the audit fee.
6) Without first ensuring that the incumbent auditors are no longer in place, it would be inappropriate to accept appointment.

Importance of the successors Auditors communication with the predecessor Auditors

1) To establish the audit fee that was previously being charged to the client.
2) To establish why the predecessor auditors were removed and whether the legal procedures were followed.
3) It’s a professional requirement.
4) To obtain preliminary background knowledge about the client.
5) To obtain preliminary information about management’s integrity.
6) To obtain the working papers.
7) As a matter of professional courtesy.
8) To assess the level of risk involvement.
9) To obtain information about actual/suspected fraud.
10) To obtain evidence relating to the ICS.
11) To determine the level of co-operation expected from the client.

The successor auditor should make specific and reasonable enquiries from predecessor auditor regarding mattes that will assist the successor auditor in determining whether to accept the engagement.

Matters subject to enquiry should include:

1) Information that might bear on the integrity of the management.
2) Disagreement with management as to accounting principles, audit procedures etc.
3) Communication with audit committees and other authorities regarding fraud, illegal activities the client and internal control related matters.
4) Reasons for the change of auditors.

Procedures after accepting appointment

1) Ensure that the pre-conditions of an audit are present i.e.

a) Check to ensure that the financial reporting framework used the client is acceptable.
b) Obtain an acknowledgement from the management that it understands its responsibility of preparing financial statements in line with the identified financial reporting framework.
c) Obtain an acknowledgement from the management that it understands its responsibilities to implement control systems that are relevant to ensure that the financial statements are not materially mis-stated.
d) Obtain an agreement from the management that they will provide you with all the information that they are aware of that is relevant to the preparation of the financial statement and that they will give you any additional information that you may deem necessary for the audit.
e) Obtain an agreement from the management that will provide you with the draft accounts on time to enable you to complete the audit within the agreed deadline.
f) Obtain an agreement from the management that will give unrestricted access to all persons within the entity from whom you may wish to gather audit evidence.

2) Ensure that your appointment is valid and obtain evidence reviewing a copy of the shareholders resolutions.
3) Ensure that the removal of the predecessor auditor is valid reviewing a copy of the shareholder’s resolutions.
4) Draft and sign the engagement letter and request the client to acknowledge receipt of the letter and to agree with the terms there in.

The engagement letter

This is a letter written the auditor and submitted to the client acting as a written confirmation of the auditor’s acceptance of the appointment and setting for the contractual relationship between the auditor and the client. It details the scope of the audit, responsibilities in the audit, basis of charging the audit fee and all the other terms of audit engagement.

Objectives of the letter of engagement

1) To confirm the auditors acceptance of the appointment.
2) To set forth the contractual relationship between the auditor and the client.
3) To indicate the respective responsibilities of the management and auditor with regard to the financial statements.
4) To confirm in writing the verbal discussions between the auditor and the client.
5) To define the auditor’s scope of work.
6) To outline the basis of charging the audit fee.
7) It acts to commit both parties s to their obligations i.e. the auditor and the management.
8) To minimize mis-understandings between the directors and the auditor.

Contents of the letter of engagement

1) An explanation or elaboration of the scope of Audit, including
references to the relevant ISA’s loss and other ethical requirements.
2) The respective responsibilities of the auditor and the management with regard to the financial statements.
3) A general description of the audit methodology that the auditor will use.
4) An expectation that the auditor will provide a management letter.
5) An expectation that the management will provide the auditor with a letter of representation.
6) A statement that due to the inherent limitations of an audit there is an unavoidable risk that some material mis-statement may remain undetected.
7) The basis of charging the audit fee.
8) Arrangements regarding concerning planning and performance of the audit.
9) Arrangements concerning involvement of internal auditors and other staff of the ………………………………
10) Other services that might be provided the auditor.
11) Any limitations on the auditor’s liability where such a possibility exists.
12) A request for the client to acknowledge receipt of the engagement letter and to agree with the terms therein.

Provisions of ISA 210 regarding the engagement letter

1) Before commencement of the Audit the auditor should agree with the client on the terms of engagement and document the terms in an engagement letter which will be signed both the auditor and the client making it a binding contract.
2) In the subsequent years audit of the same client the auditor needs not to write a new letter of engagement. He should however consider whether there are conditions that necessitate revision of the terms of engagement or a need to remind the client of the existing terms of engagement.

Examples of conditions that may necessitate a new letter of engagement to an existing client

a) A significant change in the senior management e.g. the Board, the C.E.O, Chairman of the Board.
b) Significant change in the nature and size of the client’s business.
c) Change in ownership if the company.
d) A change in the financial reporting framework.
e) Change it he legal and regulatory requirements.
f) An indication that the client mis-understood the objectives and the scope of the audit.

Reasons why it would be necessary to review the engagement letter

1) To accommodate additional scope of work since the company has opened new branches.
2) To ensure that any mis-understandings are clarified.
3) To redefine the auditors scope of work and responsibilities arising from the change.
4) To remind the client of their responsibilities with respect to financial statements.
5) To accommodate any changes in the applicable laws and legislations.
6) To revise the basis of charging the audit fee arising from the increase in the size of the entity.
7) To capture the possibility of engaging internal auditors if previously not involved in the audit.

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