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LECTURE 4: OBTAINING AND ACCEPTING PROFESSIONAL

APPOINTMENTS
1. Tendering an engagement
How assurance firms obtain clients is an important practical question, but it is
largely outside the scope of this syllabus. In brief, you should be aware that: (i)
Accountants are permitted to advertise for clients within certain professional
guidelines; and (ii) Accountants are often invited to tender for engagements which
means that they offer a quote for services, outlining the benefits of their firm and
personnel, usually in competition with other firms which are tendering at the same
time. The assurance firms obtain clients by tendering for the engagement. The
important issue need to be considered is the level of fee that they are likely to charge.
Although the price of the proposed engagement can be very important, it is not the
only consideration for the company in a tender process. Other important considerations
are:
- The quality of the service the prospective auditors are likely to provide
- The knowledge of the business they possess
- The experience of the industry they have
- The proposed personnel of the audit team
- References obtained about the audit firm
An issue to consider briefly in the context of tendering is lowballing. The IESBA’s
Code of ethics states that a firm may quote any fees it considers acceptable. In
other words, the practice of lowballing is not unethical in itself. However, ethical
safeguards should be considered as lowballing does increase the self-interest threat
of not being able to complete the audit to the appropriate standards in a commercial
way.
The Code of ethics suggest that the basis for fee computation should be disclosure
and discussed with client as soon as possible, so this would probably be
incorporated into tendering document. It states that fees should be determined with
references to:
- The seniority and experience of the person necessarily engaged on the work
- The time expended by each
- The degree of risk and responsibility which the work entail
- The nature of the client’s business, the complexity of its operation and the work
to be performed
- The priority and importance of the work to the client
- Any expenses properly incurred.

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2. Appointment ethics
 Before accepting nomination

The prospective auditors must carry out the following procedures:

Ensure Consider whether they could be disqualified on legal

professional or ethical grounds
qualified to act

Ensure existing Consider available time, staff and technical expertise

resources
adequate

Obtain references Make independent enquiries if directors are not

personally known

Communicate Enquire whether there are reasons/circumstances

with existing behind the change which the new auditors ought to
auditors know, also as a courtesy
Communicate with existing auditors (Ethical issues)
- The prospective auditors must communicate with existing auditors to the
audit being accepted,
- The client must be asked to give permission for communication to occur. If the
client refuses to give permission, the proposed auditors must decline nomination.
- The auditors must ensure that there is no independence or other ethical
problems likely to cause conflict with the ethical code.
- Prospective auditors should ensure that they have been appointed in a proper
and legal manner.
 Procedures after accepting nomination (Legal issues)

- Ensure that the existing auditors' removal or resignation has been properly
conducted in accordance with national legislation. The prospective auditors should
see a valid notice of the existing auditors' resignation, or confirm that the existing
auditors were properly removed.
- Ensure that the prospective auditors' appointment is valid. The prospective
auditors should obtain a copy of the resolution passed at the general meeting
appointing them as the company's auditors.
- Set up and submit a letter of engagement to the directors of the company.
Letters of engagement are discussed in the next section.
Once a new appointment has taken place, the new auditors should obtain all books and
papers which belong to the client from the old auditors. The former auditors should
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ensure that all such documents are transferred, unless they have a lien (a legal right to
hold on to them) over the books because of unpaid fees. They should also pass any
useful information on to the new auditors if it will be of help, without charge, unless a
lot of work is involved.
3. Factor affecting acceptance/continuance (Integrity, Competence)
Audit firms may carry out stringent checks on potential client companies and their
management. Factors to consider:
 Risk analysis

Management integrity: The integrity of those managing a company will be of

great importance

Low risk High risk

Good long-term prospects Poor recent or forecast performance

Well-financed Likely lack of finance

Strong internal controls Significant control deficiencies

Conservative, prudent accounting Evidence of questionable integrity,

policies doubtful accounting policies

Competent, honest management Lack of finance director

Few unusual transactions Significant related party or

unexplained transaction

 Ability to perform the work (auditor’s competence)

- The audit firm must have the resources to perform the work properly, as well
as any specialist knowledge or skills.
- The impact on existing engagements must be estimated, in terms of staff time
and the timing of the audit
Lastly, we should also consider whether there are benefits of performing this
engagement!
 Engagement economics (do we benefit or gain from accepting this job?)

The expected fees from a new client should reflect the level of risk expected. This
should align with the overall financial strategy of the audit firm. Sometimes, the
audit firm may want to gain entry into the client’s particular industry or to establish
better contacts within that industry. All these contribute to a total expected
economic return from a new client.
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3. Audit engagement letters

ISA 210 Agreeing the terms of audit engagements

Preconditions for an audit

The preconditions for an audit are 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.
‘In order to establish whether the preconditions for an audit are present, the auditor
shall:
(a)Determine whether the financial reporting framework to be applied in
the preparation of the financial statements is acceptable; and
(b)Obtain agreement of management that it acknowledges and
understands its responsibility:
(i) For the preparing the financial statements in accordance with
the applicable financial reporting framework, including where relevant
their fair presentation;
(ii) For such internal control as management determines is necessary
to enable the preparation of financial statements which are free from
material misstatement, whether due to fraud or error; and
(iii) To provide the auditor with:
a. Access to all information of which management is aware
that is relevant to the preparation of the financial statements
such as records, documentation and other matters;
b. Additional information that the auditor may request from
management for the purpose of the audit; and
c. Unrestricted access to persons within the entity from
whom the auditor determines it necessary to obtain audit
evidence’.
If these preconditions are not present, the auditor shall discuss the matter with
management. The auditor shall not accept the audit engagement if:
- The auditor has determined that the financial reporting framework to be applied
í not acceptable.
- Management’s agreement referred to above has not been obtained.
Audit engagement letter (Content of the letter)

ISA 210.9
‘The auditor shall agree the terms of the audit engagement with management or
those charged with governance, as appropriate.’
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Content of this letter

‘The agreed term of the audit engagement shall be recorded in an audit engagement
letter or other suitable form of written agreement and shall include:
a) The objective and scope of the audit of the financial statements;
b) The responsibilities of the auditor;
c) The responsibilities of management;
d) Identification of the applicable financial reporting framework for the
preparation of the financial statements; and
e) Reference to the expected form and content of any reports to be issued by the
auditor and a statement that there may be circumstances in which a report may
differ from its expected form and content.
f) The fact that because of the inherent limitations of an audit, together with the
inherent limitations of internal control, there is an unavoidable risk that some
material misstatements may not be detected, even though the audit is properly
planned and performed in accordance with ISAs.
g) Arrangements regarding the planning and performance of the audit,
including the composition of the audit team.
h) The basis on which fees are computed and any billing arrangements.
i) A request for management to acknowledge receipt of the audit engagement
letter and to agree to the terms of the engagement outlined therein.

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SUMMARY

Ethical
considerations

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QUESTION BANK
1. MCQs
1. The terms of engagement are recorded in a written audit engagement letter and should include:

I. The objective and scope of the audit of the financial statements

II. The responsibilities of the auditor
III. The responsibilities of management
IV. Identification of the applicable financial reporting framework for the
preparation of the financial statements
V. Reference to the expected form and content of any reports to be issued
by the auditor.

A. All of the above

B. (I) (II) and (IV) only
C. (I) (II) and (V) only
D. None

2. The content of the engagement letter should be agreed with the client before any engagement related work commences.

A. True
B. False

3. Auditors perform client screening to define the level of risk. Which of the following might indicate that an audit client could have

lower level of risk?

A. Lots of unusual transactions

B. The existence of an internal audit department
C. Conservative, prudent accounting policies
D. Evidence of questionable integrity, doubtful accounting policies

4. Your firm has received a nomination to act as Milk’s external auditor. Tim is director of Milk. Your firm’s client acceptance

procedures have identified a recent newspaper article, which reported details of court proceedings relating to a fraud committed

by Tim.

Which of following issues should be considered when deciding whether to accept the appointment as external auditor of Milk.

A. Consideration of management’s integrity

B. Poor control environment.
C. Unreliable management representation
D. All these above.

2. Scenario Question
Question 1

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Tim and Brat Co (Tim & Brat) is a firm of Chartered Certified Accountants which has
seen its revenue decline steadily over the past few years. The firm is looking to
increase its revenue and client base and so has developed a new advertising strategy
where it has guaranteed that its audits will minimise disruption to companies as they
will not last longer than two weeks. In addition, Tim & Brat has offered all new audit
clients a free accounts preparation service for the first year of the engagement, as it is
believed that time spent on the audit will be reduced if the firm has produced the
financial statements.
The firm is seeking to reduce audit costs and has therefore decided not to update the
engagement letters of existing clients, on the basis that these letters do not tend to
change much on a yearly basis. One of Tim & Brat’s existing clients has proposed that
this year’s audit fee should be based on a percentage of their final pre-tax profit. The
partners are excited about this option as they believe it will increase the overall audit
fee.
Tim & Brat has recently obtained a new audit client, Yexmerine Co (Yexmerine),
whose year end is 31 December. Yexmerine requires their audit to be completed by the
end of February; however, this is a very busy time for Tim & Brat and so it is intended
to use more junior staff as they are available. Additionally, in order to save time and
cost, Tim & Brat have not contacted Yexmerine’s previous auditors.
Required:
a) Describe the steps that Tim & Brat should take in relation to Yexmerine:
(i) Prior to accepting the audit; and
(ii) To confirm whether the preconditions for the audit are in place.
b) State FOUR matters that should be included within an audit engagement
letter.
c) Ethical Risks and steps to reduce the risks.