C2: AUDITING AND ASSURANCE

Topic
Professional Appointment
C2: AUDITING AND ASSURANCE

OVERALL INTRODUCTION

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 Topics and Coverage
OVERVIEW ON C2: AUDITING AND ASSURANCE
• This is a progression course to B3: Auditing
principles and practice taught at the intermediate
stage
• It is organised from accepting of engagements;
legal, regulatory and ethical issues; planning and
undertaking the audit work; risk assessment;
Evaluation of evidence as well as drawing
conclusions and Reporting.
• The course can be broken into about 14 topics
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 Topics and Coverage
1. Professional Appointment
2. Ethical and Legal Issues
3. Audit Planning, Materiality, and Risk
assessment
4. Internal Controls
5. Audit Evidence
6. Auditors Report
7. Going Concern

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 Topics and Coverage
8. Subsequent events
9. Audit of PFI
10.Fraud and Money Laundering
11.Audit Letters
12.Audit finalisation
13.Group Audit
14.Assurance Engagements and Public sector
Audit

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 Dos and don'ts
• Do not accumulate
• At least go through two scenario based questions at
the end of each chapter
• Understand the scenario, not necessarily to memorise
but applying the concepts in attempting a scenario
• Being aware of key ISAs and using them when
responding to exam questions
• Do not miss a class and pay attention when in class
• Go through NBAA past papers, ACCA F8 and P7
Questions, CPA Ireland past papers, CPA Ghana..

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NOW STARTING LECTURE 1..

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 Professional Appointment
To be covered
• Matters to consider Prior to Acceptance
• Professional Clearance
• Terms of Engagement
• Procedures for appointment of an auditor
• Remuneration and removal
• Statutory duties of an auditor
• Responsibilities of an auditor
• Rights of an auditor
• Auditors legal liability
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 Matters to consider Prior to
Acceptance
• Audit firms normally performs client screening
and accepts engagements with appropriate
level of risks
• ISA 210: Agreeing the terms of Audit
engagements and Code of Ethics and conduct
provides guidance on matters to be considered
• Following Matters are usually considered
before accepting an engagement.

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 Matters to consider Prior to
Acceptance
1. Preconditions for an audit
i. Acceptable FR framework to be applied in FS
prep
ii. Mgt understands and acknowledges its
responsibility for FS preps and providing relevant
info to auditors

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 Matters to consider Prior to
Acceptance
2. Professional Clearance-contacting the existing auditor
to determine if there are any reasons not to undertake
the assignment. The prospective firm should:
 Ask the client for a permission to contact with the existing
auditor (refuse if the client refuses)
 Contact the outgoing auditor through professional etiquette
letter (ask all relevant info whether to accept e.g. overdue
fees, disagreements with mgt, breach of law etc)
 If reply not received, contact outgoing auditor by other
means e.g telephone
 If not replied, may choose to proceed but with care
 If replied, consider the response and assess ethicl and
professional reasons not to accept
 The existing auditor must ask the client for a permission to
respond to the prospective auditor
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 Matters to consider Prior to
Acceptance
3. Independence and Objectvity- If the auditor is
aware that threats can not be managed to
lower levels, should decline.
4. Management Integrity- If mgt lacks intergrity,
there is a high risk of fraud or intimidation
5. Money Laundering (client due diligence) – If
ML is suspected, do not take the assignment
6. Resources- if resources are insufficient, the
quality of the work might be impacted
7. Risks- only take on clients of acceptable risks
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 Matters to consider Prior to
Acceptance
8. Fees- consider creditworthiness of the client as
non payment may create self interest. Fee
should be in line with risk level
9. Professional competence- accept if the firm has
necessary skill and experience (competence)
10.Reputation of the client -consider if association
with the client will damage your reputation

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Continuance
• Once the audit is complete, the firm must
revisit acceptance considerations to ensure
appropriateness of the decision to continue
with the client

Terms of engagement (to be covered under

Audit Letters)

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 Procedures for an appointment as an
auditor
Appointment of auditors (s. 170):
 All companies to appoint auditor at each AGM, to
hold office from end of that AGM to end of next
AGM
 Board may fill any casual vacancy, but surviving
auditor to continue acting
 Registrar may appoint auditor if company fails to
re/appoint at AGM or fill casual vacancy
 Company to notify Registrar within 7 days, otherwise
company commits an offence punishable by a fine;
 Likewise for directors

E. Chris, UDBS
 Appointment of Auditor (cont..)
Appointment of first auditor (s. 170[5]):
• Appointed by directors before first AGM
• To hold until conclusion of first AGM
• Company to appoint first auditor at AGM if directors fail
Appointment of partnership (s. 175):
• Every partner in the firm is a Certified Public Accountant
• Appointment of firm deemed appointment of all partners
Automatic appointment (s. 170[2]):
• Auditor automatically reappointed at AGM unless:
 Not qualified then for reappointment
 Resolution passed appointing someone else or expressly stating that
incumbent shall not be re-appointed
 Auditor notifies company of intention not to be reappointed

E. Chris, UDBS
 Remuneration and Removal
Remuneration (s. 170):
• Fixed by company at meeting or as otherwise
determined at meeting; or
• By directors; or
• By Registrar, but paid by the company
Replacement (removal/dismissal) (s. 197):
Special notice required for resolution at general
meeting for removing auditor before expiration of
term of office

E. Chris, UDBS
 Resignation
Auditor not seeking reappointment (resignation)
(s.177): Presumed conditions:
 Leave notice of resignation at registered office
 Notice to contain a statement that resignation is
not caused by circumstances that members or
creditors need to know about, OR
 A statement detailing out circumstances leading
to resignation for benefit of members or creditors
 Company board to, within 14 days of deposit of
notice, send a copy to the Registrar, else will be
liable to a fine
E. Chris, UDBS
 Statutory Duties of Auditors

S. 163: Auditor’s duties: Carry out such investigations

as will enable them to form an opinion as to:

 Whether proper accounting record have been kept

 Proper returns adequate for their audit have been
received from branches not visited
 Whether the individual accounts are in agreement
with the accounting records and returns

E. Chris, UDBS
 Statutory Duties of Auditors
Auditor’s report to disclose:
 S.163(2) – if proper accounting records have not been kept;
OR
 proper returns adequate for their audit have not been
received from branches not visited; OR
 individual accounts are not in agreement with the accounting
records and returns
 S.163(3) – if auditors fail to obtain all information and
explanations necessary for purposes of their audit
 S.163(4) – if disclosure of information on directors’
emoluments and other benefits is not properly done (per
S.206);
 Auditor to include in report a statement giving the missing
particulars relating to directors’ emoluments
E. Chris, UDBS
 Responsibilities of an auditor
1. Responsibility to shareholders:
• Report on accounts to be presented to AGM
• To show:
whether they got all information/explanations
required
whether in their opinion financial statements are
properly drawn to show a ‘true and fair’ view
whether financial statements comply with IFRS, if
not how they fail to so comply

E. Chris, UDBS
 Responsibilities of an auditor
2. Responsibility to third parties:
Not same as to company
3rd party cannot sue for flaws in audit
3rd party entitled to expect auditor will express
opinion with care, limited to what is justified by
work done
• NB: standards recognise others with
legitimate claim to business information
• Consider case law

E. Chris, UDBS
 Responsibilities of an auditor
Reference Case Laws:
• Re: London and General Bank (No. 2) (1895) 2 Ch.673>>
Compliance with Statements of Standard Accounting Practice
is “very strong evidence as to what is proper standard”

• Re: Kingston Cotton Mills Co. (No. 2) (1896) 2 Ch.279 >> “it is
the duty of an auditor to bring to bear on the work that he has
to perform that skill, care and caution which a reasonably
competent, careful and cautious auditor would use. What is
reasonable depends on the particular circumstances of each
case . Auditor is not bound to be a detective, a watchdog but
not bloodhound. Entitled to assume that the people of the
company are honest. In general only bound to be reasonably
cautious and careful

E. Chris, UDBS
 Resp of an auditor (cont..)
• Re: City Equitable Fire Insurance Co. Ltd. (1925) 133 LT
407
The liquidator sued the other directors for negligence.
The auditors were sued too, but the Court of Appeal
held they were honest and exonerated by provisions in
the company’s articles. The court discussed the duties
of a company director. Romer LJ said: ‘In respect of all
duties that, having regard to the exigencies of business,
and the articles of association, may properly be left to
some other official, a director is, in the absence of
grounds for suspicion, justified in trusting that official
to perform such duties honestly.’

E. Chris, UDBS
 Rights of an auditor
Auditors have right:
• of access, at all times, to books and accounts and
vouchers of the company; no confidentiality [s.176(1)]
• any information/explanations necessary to perform
duties as auditor [s.176(1)]
• to attend meeting of company’s shareholders
[s.176(3)]
• to receive notices/communications on meeting as
shareholder [s.176(3)]
• to be heard at shareholders’ meeting
• for resigning auditor, see s.178

E. Chris, UDBS
 Auditors’ legal liability
• Auditor is liable for every aspect of his public
accounting work
• Auditor has to bear in mind that many stakeholders
relying on audited accounts
• Need for utmost care in performing work

• Classification of legal liability is based on:

– Common law (liability to clients & to 3rd parties)
– Civil liability under statutory law
– Criminal liability under statutory law
– Liability as member of professional organisation

E. Chris, UDBS
 Liability under Common Law
• Common law-derived from custom and judicial
precedent rather than statutes
• Liability to clients:
– Breach of contract
– Negligence in conduct of audit
• Ordinary negligence
• Gross negligence
• Recklessness
• Fraud
• Cenco Incorporated v. Seidman & Seidman
Seidman and Seidman failed to uncover a massive fraud that was
done by Cenco's management. Cenco sued Seidman & Seidman for
negligence, but Seidman & Seidman won on the basis that the
management's wrongdoings prevented Seidman & Seidman from
uncovering the fraud.

E. Chris, UDBS
 Liability under Common Law

• Defences against client lawsuits:

– Lack of duty to perform
– Non-negligent performance
– Contributory negligence
– Absence of causal relationship

• Liability to third parties:

– Third party incurs loss by relying on misleading financial statements
• Ultramares Corporation v. Touché and the Ultramares Doctrine
• Caparo Industries, PLC v. Dickman and others
• Defences against third party suits:
– Lack of duty to perform
– Non-negligent performance
– Absence of causal relationship

E. Chris, UDBS
Civil Liability under Statutory Law
• Statutory laws –written laws, usually enacted by
a legislative body.
• Civil liability- is the responsibility for payment of
damages or other court enforcement in a lawsuit
• Applies when auditor’s work is below standard
• Client can sue for damages as compensation
– Enron, WorldCom
• Defences:
– Same as for third party suits

E. Chris, UDBS
Criminal Liability under Statutory Law

• Criminal lianility - responsibility for any illegal

behaviour that causes harm or damage to
someone or something
• Defrauding another person through knowingly
being involved with false financial statements
– United States v. Andersen
– Lessons learned from criminal cases:
• Need to investigate integrity of management as a pre-
condition for accepting client
• Criminal liability can extend to partners and staff, even with
prior record of integrity
• Independence in fact & appearance is essential in a defence
involving criminal actions.
E. Chris, UDBS
Liability as Member of a Professional
Organisation
• Disciplinary action can be taken by the
professional organisation
– Fine
– Reprimand (written or oral)
– Suspension for a limited time
– Lifetime ban from the profession

E. Chris, UDBS
 THE END

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