REGULATORY REQUIREMENTS

FOR OBTAINING ASSIGNMENTS

LECTURE TWO
The approach, obtaining assignments and nomination
Accountants and accounting firms are forbidden from directly marketing their services
to potential clients. This means that they cannot directly contact a potential client (be it
an individual or an organisation) and “pitch” the services they offer. In addition they
cannot also engage in false advertising of any kind (e.g. claim expertise and experience
they do not have) or unfairly criticise the work of other accountants.

Therefore, the assumption is made that the audit engagement process begins with an
organisation approaching an accountant. At this point the organisation describes the
type of audit work it would like conducted and discussions as well as negotiations
begin.
The approach, obtaining assignments and nomination (Cont…)
Matters that would be covered and agreed upon in these talks would be:

1. The objective of the audit

2. The extent of access to information the auditor would have

3. He extent to which the auditor would be responsible for uncovering fraud

4. The extent to which the auditor would be responsible for evaluating internal control
systems

5. The number (if any) of areas of special concern

6. The remuneration that would be paid to the auditor.

The approach, obtaining assignments and nomination (Cont…)
• At this point the accountant (i.e. the nomine auditor) must also ascertain whether he has
the necessary expertise, knowledge and resources (manpower and time) to competently
and diligently complete the audit.
• The accountant must also be reasonably certain that taking on the assignment will not
cause him to violate any of the five main fundamental principles of the Code of Ethics.
• The audit fees quoted by the auditor must reflect the level of risk expected in respect of
the audit and should not breach the 10% / 15% maximum rule for fees received from any
single client. (i.e. if the client is a public interest company, the fees should not exceed
15% of the total fees received by the firm and for other clients, it should not exceed 10%)
• In order to understand the entity, the auditor will also assess the integrity of the board of
directors running the company.
Process through which an auditor obtains an audit engagement
Accepting an engagement
According to ISA 210, auditors need to carry out the following steps before
accepting a new audit or continuing on an existing audit engagement.

Step 1: Determine whether the financial reporting framework to be applied in the

preparation of the financial statements is acceptable. For determining this, the
auditor needs to consider the following factors:
i. The nature of the entity,

ii. The nature and purpose of the financial statements

iii. Whether law or regulations prescribes the applicable reporting framework.

 Accepting an engagement (Cont…)
Step 2: Obtain an acknowledgement from the management relating to its responsibility on the following
matters:

i. Preparation of 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 that are free from material misstatement, whether due to fraud or error; and

iii. To provide the auditor with:

• Access to all relevant information (including records, documentation) relating to the preparation of the
financial statements,

• Any additional information that the auditor may request from management and

• Unrestricted access to persons within the entity from whom the auditor determines it necessary to obtain
audit evidence.
Who can be appointed as auditor?
a) Only a member of a recognised supervisory body is eligible to be appointed as an auditor.
b) An external auditor is an independent person i.e. not related to the entity in any capacity
other than as an auditor. Therefore, a person cannot be appointed as an auditor if he is:
i. An officer or employee of the company
ii. An officer or employee of an associated company, parent company or subsidiary company
iii. A partner or an employee of an officer or employee of the company, or
iv. A partnership of which such a person is a partner.

c) A person is qualified to be an auditor only if he possesses a current audit-practising

certificate issued by a recognised supervisory body.
d) In addition to the above, a qualified auditor should possess integrity, objectivity,
professionalism, good communication skills, good information technology skills and
thorough knowledge of accounting and auditing issues.
Who appoints an auditor?
Generally, an auditor is appointed by the shareholders in the Annual General
Meeting and holds his post until the conclusion of the next AGM in which the
auditor for the next year is appointed. Sometimes an auditor is appointed by
the directors or the audit committee.

For entities in which a government own at least 50% (i.e. public body), their
accounts are audited by Controller and Auditor General (CAG). This is as per
provision from the Constitution of United Republic of Tanzania of 1977 and
the public audit act of 2008.
 Removal of an auditor
Generally an auditor is removed / resigns when there is a serious disagreement
between the auditor and management, such as a disagreement on the accounting
policies.
In order to protect the interests of the auditor as well as the shareholders, in many
countries, the law requires the consent of a majority of shareholders for the
removal of the auditor so as to protect the interests of the auditor. It also provides
an opportunity for the auditor to make a representation before all the
shareholders.
The facts should be communicated to the shareholders. The letter communicating
the circumstances is usually called a statement of circumstances.
 Resignation of an auditor
Generally an auditor resigns when there is a serious disagreement between the
auditor and management, such as a disagreement on the accounting policies.

The auditor should communicate his resignation to the entity. The communication
should be made in writing along with a statement of circumstances.

According to Company Act 2002, Section 177 require that the appointment of the
auditor, his removal or his resignation should be communicated to the regulatory
authorities.
 Scope of work
An audit engagement occurs when an organisation has enlisted the services
of an accountant to conduct an audit. The accountant and the organisation
have worked out the terms and scope of the audit and documented these in
an engagement letter which is then signed by both parties.

Effectively, the engagement letter acts as a contract between auditor and

client. Furthermore it also ensures that no misunderstanding arises between
the client and the auditor.
 Contents of an audit engagement letter
It contains:
(a) Confirmation that the auditor has accepted the appointment.
(b) A summary of the responsibilities of client’s management and auditors;
(c) Details on:
i. The objective of the audit
ii. The responsibilities of the directors
iii. The responsibilities of auditors and the scope of the audit
iv. The form of report that will be issued after the audit
v. Any other services that would be provided by the auditor
vi. The method through which the audit fees would be calculated and billing
arrangements made
vii. The various applicable legislations
The following information can also be included in an audit engagement letter:
• The form in which any other communication may take place between the client and the auditor.
• The auditor’s expectation that the management will provide the auditor with written
representations.
• The fact that even after conducting an audit in accordance with ISAs, the auditor may not detect
some material misstatements due to the inherent limitations of the audit and the internal controls
used by the client.
• The arrangements to be made for planning and performing the audit e.g. composition of audit team.
• Involvement of other auditors, experts, internal auditors and other staff.
• Any arrangement that must be made with the previous auditor.
• Any obligation that requires the auditor to provide audit working papers to other parties.
• A request to the management to acknowledge the receipt of the engagement letter and to accept the
terms of the audit.
• Any restriction on the liability of the auditor.
• A reference to any further agreement between the auditor and the client.
• Practical arrangements, such as audit timing and reporting dates.
Take Away
Question 1:

Aliy is the managing director of Ilala Company. His sister, Maryam, is a qualified
chartered accountant from a recognised supervisory body holding audit-practising
certificate. She is not directly related to Ilala Co in any manner other than being Aliy’s
sister. Aliy wants to appoint her as an external auditor of Ilala Co, as he thinks that she
would be the best person to report on the financial position of Ilala Co bearing in mind
she is his sister.
Required:
State whether Maryam can be appointed as an external auditor of Ilala Co.
Take Away
Question 2

Farid is a partner with a large-sized firm of Chartered Certified Accountants. He has

just been approached by Annur Technologies, a large manufacturing firm to be their
statutory auditor. Farid is very interested in taking the assignment and has set up a
meeting with the organisation’s Chief Financial Officer and Finance Director to
progress matters.

Required:

Discuss and describe the process that Farid must now follow to earn an audit
engagement from Annur Technologies