F8-05 Auditor Appointment

Session 5
Auditor Appointment
FOCUS
This session covers the following content from the ACCA Study Guide.
B. Planning and Risk Assessment

1. Obtaining and accepting audit engagements
a) Discuss the requirements of professional ethics in relation to the
acceptance of new audit engagements.
b) Explain the preconditions for an audit.
c) Explain the process by which an auditor obtains an audit engagement.
d) Justify the importance of engagement letters and their contents.
Session 5 Guidance
Attempt Example 1 and read section 1.
Understand why both the current auditor and the prospective auditor must have the entity's
permission to communicate with each other (s.1.1.3, s.1.2, s.2.1). If either fails to obtain that
permission, the prospective auditor must decline.
Understand the need for communication and transfer of books and papers requirements for the
existing auditor (s.2).
(continued on next page)

F8 Audit and Assurance (INT) Becker Professional Education | ACCA Study System
Ali Niaz - ali.niaz777@gmail.com

VISUAL OVERVIEW
Objective: To describe the professional appointment process as it specifically applies to
the auditor.
NOMINEE EXISTING AUDITOR

• New Professional Work • Response
"Professional
• Communication Clearance" • Transfer of Books and Papers
• Relevant Matters • Transfer of Information
• Unpaid Fees • Review of Working Papers
• Additional Professional Work
TERMS OF AUDIT
ENGAGEMENTS
• Preconditions
• Purpose
• Principal Contents
• Recurring Audits
• Sample Letter
FEES
REAPPOINTMENT
• Audit and Assurance
• Lowballing
Session 5 Guidance
Learn the preconditions for an audit, including management's responsibilities (s.3.1).
Learn the principal contents of the engagement letter, which is one of the communications with
those charged with governance (s.3.2, s.3.3, s.3.5).
Read sections 4 and 5 on fees and reappointment.
© 2014 DeVry/Becker Educational Development Corp. All rights reserved. 5-1

Session 5 • Auditor Appointment F8 Audit and Assurance (INT)
1 Nominee
In all three stages, the prospective auditor should determine if there

are any threats to complying with relevant fundamental principles.
1.1 New Professional Work
Example 1 Change of Auditors
Suggest FOUR reasons why an entity may wish to change its auditor.
Solution
1.
2.
3.
4.
< The prospective auditor may have been:

recommended directly to the potential client; or
=
= asked to compete against other firms as part of a tendering
process (see s.3).
< There are three basic stages in the auditor appointment process:
1. Client screening and acceptance
2. Engagement acceptance
3. Professional appointment.*
1.1.1 Client Screening and Acceptance

< Client screening is an important part of an auditor's risk *Although the syllabus
management process. There are three main issues to refers specifically
consider when screening a potential client. to the auditor, the
1. Is the audit firm able to audit the potential client? procedures explained
Factors that the auditor must assess include: are equally applicable
to any assurance or
= Whether the firm has the expertise necessary to carry out other professional
the engagement. engagement (e.g. as
= Whether the firm has the staff and capacity required to an accountant).
complete the engagement and meet reporting deadlines.
= Whether the auditor is independent of the potential client.
= Whether there are any conflicts of interest.
5-2 © 2014 DeVry/Becker Educational Development Corp. All rights reserved.

F8 Audit and Assurance (INT) Session 5 • Auditor Appointment
2. Does the audit firm want to be associated with the

potential client? Factors that must be assessed include:
=The complexity of the client's operations and its overall
audit risk. *As evidenced, for
= The reputation of the potential client. example, by prior
= The apparent integrity of its management. years' audit reports.
= Its commitment to the application of appropriate accounting
policies.*
= The potential client's commitment to internal controls.
= Evidence of fraud or non-compliance with laws and
regulations
3. Is the potential client financially viable? The audit firm
will wish to avoid fee collection problems and disputes.
< Also, in some jurisdictions, it is a legal requirement to
undertake procedures to "verify the identity" of the potential
client (e.g. under money-laundering regulations). For major,
international entities, such procedures will be straightforward
(although onerous) but for small entities (e.g. with two
directors), extensive checks and references on the entity and its
directors may be necessary (e.g. to confirm that it is bona fide).
1.1.2 Engagement Acceptance

< The auditor should only agree to provide those services
which he is competent to perform (fundamental principle of
professional competence and due care).
< The prospective auditor should do the following in order to
determine whether he can service the client:
= Understand the entity's business.
= Assess the specific requirements of the engagement and
the purpose, nature, and scope of the work to be performed
(e.g. laws and regulations, use of experts, assurance from
controls, CAATs, reliance on internal audit).
= Assess the logistics of the engagement (e.g. locations,
competent audit staff, time frame).
1.1.3 Professional Appointment
< The significance of any threat to the fundamental principles
should be evaluated (e.g. threats to professional competence
if an engagement is accepted without understanding all the
relevant facts).
< A key safeguard is communication with the current auditor to
determine whether there are any professional or other reasons
to not accept the engagement.*
*Communication with the existing auditor is not just a matter of

professional courtesy. Its main purpose is to enable the prospective
auditor to ensure that the client has not acted in any way which, on
ethical grounds, would preclude accepting the appointment. After
considering all the facts, the auditor should wish to act for the client.
Thus, he must communicate with the existing auditor, except where
the client has not previously been audited.

1.2 Procedure for Communication With

Current Auditor
< The auditor should request that the prospective client write
the current auditor to inform him of the proposed change
and to give permission to discuss the client's affairs with
the prospective auditor. The prospective client should give
permission to communicate with the existing auditor in
writing. If permission is refused, the appointment must be
declined.
< Once permission has been obtained, the auditor should write
to the existing auditor requesting information relevant to
deciding whether to accept the appointment (e.g. if there has
been any action by the client which would, on ethical grounds,
mean declining to accept the appointment).
< If the current auditor does not respond within a reasonable
time, a final letter should be sent by recorded delivery stating
that "no matters" will be assumed unless advised otherwise
and if there still is no reply the auditor should:
= Seek to obtain information about potential threats from
other sources (e.g. enquiries of third parties, those charged
with governance). This may require the potential client's
permission, depending on the source.
= Report the current auditor to the relevant professional body
(e.g. ACCA) for unprofessional behaviour.
1.3 Relevant Matters to Consider

< Any information supplied by the existing auditors should be
considered carefully before deciding whether to accept or
reject the appointment.
< Prospective auditors should try to find out the reason for the
change of auditors. They should be careful that by accepting
an appointment they are not assisting clients to act improperly
or unlawfully.
< If there is a conflicting view between the client and the current
auditor which has led to the potential replacement of the
auditor, discuss this with the client to be satisfied that:
= the client's view can be accepted as reasonable; and
= the client will accept that the prospective auditor may
express a similar opinion to the current auditor.
If not, the appointment must be declined.
< If the client failed or refused to supply the existing auditor
with necessary information then, in all probability, the client
will do the same to the new auditor. This is effectively a
limitation on scope applied by the client and, as forewarned,
the prospective auditor should probably decline the
appointment.
< Unlawful acts or defaults by the client (e.g. defrauding
taxation authorities) place the prospective auditor on guard as
to the integrity of the client. Such matters must be carefully
discussed with the client to establish whether it is prepared to
accept the advice offered. If not, decline the appointment.

1.4 Unpaid/Overdue Fees to Existing Auditor

< Existence of unpaid/overdue fees is not of itself a reason for
not accepting nomination (nor the current auditor refusing to
cooperate with the prospective auditor).*
*Unpaid or overdue fees may be a signal of similar problems in the

future for the prospective auditor. The reason for not paying the fees
needs to be established.
< It is a matter of discussion between the auditors as to how

much assistance the new auditor will give to recover the fees
of the old auditor.
< Prospective auditors normally would be expected to draw
the attention of their client to the fact that fees are due and
unpaid and to suggest that they should be paid.
1.5 Additional Professional Work

< A member may be invited to undertake work which is in
addition to the continuing work being carried out by the
client's existing auditor who is not being replaced. Before
accepting the work, the member should notify the existing
auditor of the work he has been asked to undertake. By
doing so, the existing auditor will be able to provide relevant
information needed for the proper conduct of the work.

2 Existing Auditor
2.1 Response
< Ensure that the client's permission to discuss affairs fully
with the prospective auditor has been obtained. In some
jurisdictions, there may be a legal requirement to reply, even
if the client's permission has not been given.
< The existing auditor should answer without delay, stating:
= that the client's permission has not been given for
communication;
= that there are no matters of which the prospective auditor
should be aware; or
= those factors of which the prospective auditor should be
aware.*
*When responding to the prospective auditor, information should be

provided honestly and unambiguously. It is not sufficient to state
that unspecified factors exist. The nature and details of the factors
should be given. However, in some circumstances (e.g. money
laundering) legal advice may need to be taken before replying to the
prospective auditor.
If the existing auditor is approached by a prospective auditor

without first being notified of this by his client, the existing
auditor should notify the client and decline to provide the
prospective auditor with any information other than stating the
reason why (i.e. client has not given them permission).
2.2 Transfer of Books and Papers

< The former auditor should transfer the client's books and
papers promptly to the successor auditor or to the client.*
< Any completed documents which are the subject of the
engagement (e.g. financial statements, tax returns, etc) must
be transferred to the client.
< Working papers and drafts prepared by the auditor belong to
the auditor.

2.3 Transfer Information

< The former auditor should provide the new auditor with
all "reasonable transfer information" (lack of which might
prejudice the client's interest) promptly. No charge should be
made unless a significant amount of work is involved.
< "Transfer information" is defined as:
= a copy of the last set of accounts formally approved by the
client; and
= a detailed trial balance that is in agreement with the
accounts.
2.4 Review of Working Papers

< In most jurisdictions, clients and the successor auditor have
no right to demand access to documents and working papers
that belong to the previous auditor.
< However, it is not uncommon as part of the transfer of
information for the previous auditor to allow a new auditor to Where the auditor
review some or all of his working papers. This assists the new claims a right to
auditor, for example, in assessing the reliability of opening possess the client's
balances. books and records to
secure unpaid fees for
work done (a "lien"),
care must be taken to
ensure compliance with
the law. For example,
In the UK, it is a legal requirement (Companies Act 2006) for the no lien can be held
previous auditor to allow the incoming auditor reasonable access to over books and records
"working papers", if required. which by law must
Reasonable access does not mean access to all working papers or be kept at a client's
access to budgets, fee calculations, time records, etc. registered office.

3 Terms of Audit Engagements (ISA 210)
The objective of the auditor is to accept or continue an audit

engagement only when the basis on which it is to be performed has
been agreed, through:
 establishing whether the preconditions for an audit are present; and
 confirming that there is a common understanding between the
auditor and management and, where appropriate, those charged
with governance, of the terms of the audit engagement.
3.1 Preconditions
Preconditions for an audit—the use by management of an

acceptable financial reporting framework in the preparation of the
financial statements and the agreement of management and, where
appropriate, those charged with governance to the premise on which
an audit is conducted.
*This normally is
< To establish whether the preconditions are present, the done in obtaining an
auditor must: understanding of the
= Assess the appropriateness and acceptability of the financial entity and its reporting
reporting framework to be applied in the preparation of the requirements.
financial statements.*
= Obtain management's agreement that it acknowledges and
understands its responsibilities for:*
— the preparation and fair presentation of the financial
statements in accordance with the applicable financial
reporting framework;
— internal controls to enable the preparation of financial *This forms part of
the engagement letter,
statements which are free from material misstatement,
representation letter
whether due to fraud or error;
and the audit report.
— providing the auditor with unrestricted access to all For new engagements,
information of which management is aware that is the auditors would
relevant to the preparation of the financial statements discuss these matters
(e.g. records, documentation and other matters); with those charged
— unrestricted access to additional information that the with governance
before issuing the
auditor may request from management for the purpose of
engagement letter
the audit; and
(which is a formal
— unrestricted access to persons in the entity from whom the acceptance).
auditor determines it necessary to obtain audit evidence.

< If there are any unresolved doubts (after discussions with

management) that the pre-conditions cannot be met, the
auditor must not accept or continue the engagement.
< If the client proposes to subject the auditor to any limitations
on the scope of the audit or restrict access to information
which would result in qualifying the audit report, the
engagement should not be accepted.
3.2 Engagement Letter
The purpose of the engagement letter is to help avoid

misunderstandings between client and auditor. This is done by
documenting and confirming:
 management's and auditor's acceptance of their respective
responsibilities;
 auditor's acceptance of the appointment;
 identification of the applicable reporting framework;
 objective and scope of the work (audit); and
 form and content of any reports, circumstances in which the form
and content may differ (e.g. modifications), limitation of such
reports and to whom reports will be delivered.
3.3 Principal Contents*

< The objective and the scope of the audit, including reference
to applicable legislation, regulations, ISAs, and ethical and
other pronouncements of the professional bodies to which the
auditor adheres.* *See section 3.5 for an
example letter.
*Where other services are provided, engagement letters should also

be used for each service.
< Management's responsibility for the financial statements and

for establishing and maintaining effective internal control.
< The financial reporting framework adopted by management in
preparing the financial statements.
< The form of any reports or other communication of results of
the engagement.
< The fact that there is an unavoidable risk that some material
misstatement may remain undiscovered.
< Expectation of receiving from management written
confirmation concerning representations made in connection
with the audit.

< Unrestricted access to whatever records, documentation and

other information which management, those charged with
governance and employees requested in connection with the
audit.
< Agreement that management will inform the auditors of any
material subsequent events affecting the financial statements
between the date of the audit report and the issue of the
financial statements.
< A request for the client to confirm the terms of the engagement
by acknowledging receipt of the engagement letter.
< The basis on which fees are computed and any billing
arrangements.
< When relevant, arrangements concerning:
= other auditors and experts;
= internal auditors and other client staff;
= predecessor auditor;
= any restrictions on the auditor's liability (if allowed by law);
= any reference to any further agreements between the
auditor and the client;
= any obligations (legal or regulatory) to report to other third
parties;
= any obligations to provide audit working papers to other
parties (e.g. external quality control reviews, regulatory
requirements).*
*Where additional auditing requirements are required by local law

and regulations (e.g. the UK's Companies Act 2006, London Stock
Exchange listing rules), they will need to be incorporated into the letter.

3.4 Recurring Audits

< The auditor should review the engagement letter prior to
commencing each audit cycle to ensure that the terms are still
appropriate.*
< It may be appropriate for the auditor to revise the terms of
the audit engagement or remind the entity of existing terms *Under ISA 210, the
when: auditor must always
consider whether the
= There is an indication that the entity does not understand client needs reminding
the objective and scope of the audit. of the terms of the
= There are revised or special engagement terms. engagement letter.
= There has been a recent change in senior management.
= There has been a significant change, for example, in:
— ownership;
— the nature or size of the business;
— legal or regulatory requirements;
— the financial reporting framework; or
— other reporting requirements.
< Where an engagement letter needs revising it should be
approved by the client. If the client refuses, the auditor
should consider the implications for his ability to continue to
act for the client.
< Where the client insists on changes to the terms of engagement
which are not acceptable to the auditor, the auditor should
consider the significance of the threats (if any) to the
fundamental principles and resign from the audit, if necessary.
Example 2 Updating Engagement Letters
Suggest FIVE factors which may make it appropriate for the engagement letter to
be revised.
Solution
1.
2.
3.
4.
5.

3.5 Sample Engagement Letter

The sample letter is for use as a guide in conjunction with the
considerations outlined in ISA 210 and will need to be varied
according to individual requirements and circumstances.
To the appropriate representative of management or those charged with governance of ………… Addressed to
You have requested that we audit the financial statements of …………, which comprise the statement
of financial position as at …………, and the statement of comprehensive income, statement of ID of
changes in equity and statement of cash flows for the year then ended, and a summary of statements
significant accounting policies and other explanatory notes. We are pleased to confirm our
acceptance and our understanding of this engagement by means of this letter. Our audit will be
conducted with the objective of our expressing an opinion on the financial statements. Objective
We will conduct our audit in accordance with International Standards on Auditing.
Those Standards require that we comply with ethical requirements and plan and perform the audit Standards
to obtain reasonable assurance about whether the financial statements are free from material followed
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and Detail of what
disclosures in the financial statements. The procedures selected depend on the auditor's an audit is
judgement, including the assessment of the risks of material misstatement of the financial about
statements, whether due to fraud or error. An audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of accounting estimates made by management, as
well as evaluating the overall presentation of the financial statements.
Limitation
Because of the inherent limitations of an audit, together with the inherent limitations of internal
because of
control, there is an unavoidable risk that some material misstatements may not be detected, even
nature of an
though the audit is properly planned and performed in accordance with ISAs.
audit
In making our risk assessments, we consider internal control relevant to the entity's preparation Management
of the financial statements in order to design audit procedures that are appropriate in the letter
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's
internal control. However, we will communicate to you in writing concerning any significant
deficiencies in internal control relevant to the audit of the financial statements that we have
identified during the audit.
Our audit will be conducted on the basis that management and, where appropriate, those charged
with governance, acknowledge and understand that they have responsibility:
(a) For the preparation and fair presentation of the financial statements in accordance with Management's
International Financial Reporting Standards; responsibility
(b) For such internal control as management determines is necessary to enable the preparation (may be
of financial statements that are free from material misstatement, whether due to fraud or modified to
error; and include specific
responsibilities
(c) To provide us with: as defined by
(i) Access to all information of which [management] is aware that is relevant to the preparation local law)
of the financial statements such as records, documentation and other matters;
(ii) Additional information that we may request from [management] for the purpose of the
audit; and
(iii) Unrestricted access to persons in the entity from whom we determine it necessary to
obtain audit evidence.
An example copy of an unmodified audit report is attached to this letter, although the form and
content of our report may need to be amended in the light of our audit findings.
As part of our audit process, we will request from management and, where appropriate, those Representation
charged with governance, written confirmation concerning representations made to us in connection letter
with the audit.
We look forward to full cooperation from your staff and we trust that they will make available to us Insert
whatever records, documentation and other information are requested in connection with our audit. additional
information
Please sign and return the attached copy of this letter to indicate that it is in accordance with your regarding fee
understanding of the arrangements for our audit of the financial statements. arrangements
XYZ & Co and billings, as
appropriate
Acknowledged on behalf of ABC Company by Sign and
(signed) return
…………
Name and Title
Date

4 Fees
4.1 Audit and Assurance Work
4.1.1 Basis of Fees
< The auditor is in business. As business people, auditors will
expect to earn a reasonable return for their work, effort and
expertise, and to make a profit.
< The level of fees charged for each assignment is basically
a commercial decision. A standard approach is to base the
fees quoted (and/or charged) to reflect the time spent and
the skills and experience of the staff involved. For example,
the more complex or higher the risk of the assignment, the
greater the level of expertise (e.g. manager and partner level)
required, resulting in a higher fee.
< The basis of the fee should be stated in the engagement
letter together with any arrangements for the timing and
delivery of documents, processes, information and other audit
requirements by the client (e.g. books and records, schedules
to be audited).
< If the expected fee is exceeded (e.g. because of spending
more time on a particular area), the recoverability of
additional fees should be discussed with the client. Good
client management includes giving warning of such a
possibility due to factors:
= caused directly by the client (e.g. non-delivery of items as
agreed in the engagement letter resulting in additional work
by the auditor); or
= outside the control of the auditor and client (new legal
requirements).
< For new clients, it is important that a sustainable fee is initially
quoted. This will require a reasonable understanding of the
business and the level of work which will be required (e.g.
initial time and service-level budgets).
4.1.2 Contingency Fees

< It is unacceptable to charge audit and assurance fees on the
basis of a percentage of profits or on a contingency basis
(e.g. "if we qualify our report, then no fee"). Special offers
(e.g. "buy one, get one free") are also strictly prohibited.
Such action calls into doubt the professional's integrity and
independence, and also may be considered as bringing the
profession into disrepute.
< In areas other than audit and assurance, contingency or flat
rate fees may be charged, provided such action does not bring
the profession into disrepute. Examples include:
= Fixed fees for standard preparation of accounts and
completion of tax returns.
= Contingency fees for certain consultancy services (e.g.
management buyouts or raising venture capital) where
the ability to pay depends on the success or failure of the
project.

4.2 Lowballing
< "Lowballing" (also "low balling") or "predatory pricing" occurs
when a firm seeks to increase its market share or retain a
client by dropping its quote for an audit fee to undercut its
competitors or preempt a possible tender situation.
< There is a public perception that such action would cause the
quality of the audit to decline (e.g. because the quoted fee
is below cost) especially where, after a competitive tender,
the current auditor retains the client but with a significant
reduction in fees.
< Also, although a client may be won or retained through a low
audit fee, any "loss" may be more than compensated by fees
obtained for additional services. This creates a self-interest
threat to independence. However, "loss leadership" may
not be an effective business strategy because the Sarbanes-
Oxley Act prohibits US-listed company auditors from providing
other services to audit clients, and corporate governance
codes require greater oversight of other services auditors can
provide (e.g. under the UK Corporate Governance Code).*
*Initial research has shown that average audit fees have increased
since corporate governance changes were introduced. This provides
some evidence of a historical "loss leadership" approach.
< The ACCA's Code of Ethics does not specifically prohibit

lowballing. However, the quality of an assurance engagement
cannot be (or perceived to be) compromised by low fees. If
there is a perception that quality has been compromised,
then the auditor's integrity and independence is threatened.
The only safeguard against this is for the auditor to clearly
demonstrate that no compromise has occurred; otherwise, the
engagement must be declined.
< The level of fees from year to year (especially on new clients
and where reappointment results in a reduction) is one aspect
of monitoring firms (by a recognised supervisory body).
Particular attention will be paid to the time spent, level of work
and seniority of staff assigned to the audit in such cases.
< If, in the course of an investigation into unsatisfactory
work, there is evidence of the work having been obtained or
retained by quoting an uneconomic fee (e.g. at below cost),
such evidence will be considered in determining appropriate
disciplinary action.

5 Reappointment
< The appointment of an entity's auditor is usually just for one
year. After completion of the audit, the auditors will usually
"offer themselves for reappointment" at the annual general
meeting (AGM).
< Before doing so, the auditor must carry out similar procedures
to those needed for an initial appointment (see s.1.1):
= From the work carried out during the course of the
audit just completed and audit findings, reassess their
understanding of the business, etc (see s.1.1.1).
= Reassess the specific requirements for the continuing
engagement and the purpose, nature and scope of the work
to be performed (these may well change compared to the
prior audit). Together with the updated understanding of
the business, this enables the auditor to assess whether he
can continue to service the client.
= Reassess the risks to compliance with the fundamental
principles, fees, availability of audit staff and timing of
services.
= Assess the risk to the auditor of continuing to be
associated with the client (e.g. recovery of fees, integrity of
management, risk of business failure).
< In summary, the auditor determines based on their experience
and findings and expected changes, whether they are still fit
and proper, willing and able to continue their relationship with
the client.

Summary
< The stages of the auditor appointment process are:
• client acceptance;
• engagement acceptance; and
• professional appointment.
< Before accepting a new engagement, the nominee should contact the existing auditor to
request information relevant to accepting the nomination.
< Both the prospective and current auditors must have the entity's permission to
communicate with each other. If permission is refused, the nomination must be declined.
< The existing auditor should transfer the client's books and papers promptly to the successor
auditor or to the client.
< Preconditions for an audit are management's use of an acceptable financial reporting
framework and acknowledgement of responsibilities (e.g. for internal controls).
< The engagement letter documents respective responsibilities, the financial reporting
framework, the scope of the audit, the form and content of the reports, fees, etc.
< Audit and assurance fees cannot be based on a percentage of profits or on a
contingency basis.
< Lowballing is not specifically prohibited but must not compromise audit quality.

Session 5
Session 5 Quiz
Estimated time: 20 minutes
1. Describe the procedures an auditor should carry out if asked to accept a new client. (1.1)
2. Describe the main purpose of the communication between the prospective auditor and the
current auditor, who is being replaced. (1.2)
3. Discuss what an existing auditor will require before communicating with a prospective
auditor. (2.1)
4. Describe the preconditions for an audit. (3.1)
5. Discuss the purpose of an engagement letter. (3.2)
6. List SIX of the principal contents for an engagement letter. (3.3)
Study Question Bank

Estimated time: 40 minutes
Priority Estimated Time Completed
Q7 Viswa 40 minutes
Additional
Q8 Carling

EXAMPLE SOLUTIONS
Solution 1—Change of Auditors
1. The entity is seeking to obtain better value for money in the
provision of audit and other professional services and/or a wider
range of services (one-stop shopping).
2. On change of ownership of an entity (e.g. as a result of takeover,
merger or management buyout (MBO)).
3. When audit firms merge (e.g. a conflict of interests arises, or the
entity considers that the new firm is too large to give a "personal
service").
4. Where an audit firm ceases to operate.
5. Users of the financial statements and providers of finance (e.g.
banks) expect organisations achieving a size or status (e.g. being
listed on a recognised stock exchange) to have multinational
accountancy firms as auditors.
6. The entity has a policy of auditor rotation (e.g. every 10 years).
7. Current auditors do not seek reappointment.
8. If a vacancy arises through the death or incapacity of the auditor
(where auditor is a sole practitioner).
Note: Only four reasons were required.
Solution 2—Updating Engagement Letters

1. Identification that the entity has misunderstood the objective and the
scope of the audit.
2. Revised terms of the engagement.
3. Changes in senior management (e.g. new directors).
4. Significant change in the nature or size of the business.
5. Change in legal or regulatory requirements including references
to legislation in the letter which are no longer appropriate (e.g.
Companies Act 1985 superseded by Companies Act 2006).
6. Change in the financial reporting framework.
7. Change in other reporting requirements.
Note: Only five answers were required.

NOTES

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Session 5

B. Planning and Risk Assessment

(continued on next page)

Ali Niaz - ali.niaz777@gmail.com

NOMINEE EXISTING AUDITOR

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In all three stages, the prospective auditor should determine if there

1.1 New Professional Work

Example 1 Change of Auditors

< The prospective auditor may have been:

1.1.1 Client Screening and Acceptance

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2. Does the audit firm want to be associated with the

1.1.2 Engagement Acceptance

*Communication with the existing auditor is not just a matter of

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1.2 Procedure for Communication With

1.3 Relevant Matters to Consider

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1.4 Unpaid/Overdue Fees to Existing Auditor

*Unpaid or overdue fees may be a signal of similar problems in the

< It is a matter of discussion between the auditors as to how

1.5 Additional Professional Work

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*When responding to the prospective auditor, information should be

If the existing auditor is approached by a prospective auditor

2.2 Transfer of Books and Papers

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2.3 Transfer Information

2.4 Review of Working Papers

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3 Terms of Audit Engagements (ISA 210)

The objective of the auditor is to accept or continue an audit

Preconditions for an audit—the use by management of an

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< If there are any unresolved doubts (after discussions with

3.2 Engagement Letter

The purpose of the engagement letter is to help avoid

3.3 Principal Contents*

*Where other services are provided, engagement letters should also

< Management's responsibility for the financial statements and

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< Unrestricted access to whatever records, documentation and

*Where additional auditing requirements are required by local law

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3.4 Recurring Audits

Example 2 Updating Engagement Letters

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3.5 Sample Engagement Letter

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4.1.2 Contingency Fees