TENDERING AND CLIENT SCREENING

Tendering
This is when an audit firm is approached by a prospective client to bid for
their audit
Audit Firm Considerations:

 How did the client get to know about them?

 Why has the firm been approached particularly?
 What is the scope of the audit?
 How risky is the audit to the firm?
 Does the firm have the necessary resources

Tender documents contents:

1. Fee and how it has been calculated

2. An assessment of the requirements of the prospective client
3. Our approach to the requirements
4. Deadlines and information needed
5. Outline of the firm and our staff
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Client Screening
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.

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?

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

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..
 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?
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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

The following procedures should be undertaken if an auditor is offered an

audit role:

1. The client should be asked for permission to contact the outgoing auditor.
(If not given– refuse the position)
2. Contact the outgoing auditor to ask if there is any professional reason not
to take the role.
3. Ensure process of appointment and resignation of previous auditor was
carried out correctly.
4. Check we are sufficiently Independent
5. Ensure that the audit firm is properly qualified to act for the client (Legality /
Ethics).
6. Undertake risk assessment of the firm.
7. Ensure that the audit firm has adequate resources to conduct the audit.
8. Consider size of client, business area etc and how this will affect the audit.
9. What level of fees will be provided – is it worth it? Does it make up more
fees % than allowed?

Tendering for audit work

Things to consider...

1. Fee

o A fee will be quoted for a piece of audit work before it is carried out
under a tendering process
o 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

o 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:

o Proposed audit fee

o Nature, purpose and legal requirements of an audit.
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o Assessment of the requirements of the client.

o How audit firm proposes to satisfy requirements
o Any assumptions made.
o Proposed audit methodology.
o Outline of audit firm and personnel
o 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

 The client will decide on the basis of clarity, relevance, professionalism,

reputation, timeliness of delivery and originality which firm will conduct the
audit

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