QUESTIONS AND ANSWERS Auditing Help

Your audit firm has been appointed to conduct a full scope of the financial statements covering a period of three months of Clever Audit Limited. Clever Limited needs the audit report for obtaining a bank loan. While verifying certain account heads you identify certain problems for which you are not provided satisfactory replies by the client. At the same time Clever limited approaches you to change the scope of the assignment from a full scope audit to a review assignment. They give you the reason that they have misunderstood the scope of assignment earlier. What course of action would you adopt in this situation?

A request from the client for the auditor to change the engagement may result from a change in circumstances affecting the need for the service, a misunderstanding as to the nature of an audit or related services originally requested or a restriction on the scope of the engagement, whether imposed by the management or caused by the circumstances.

A change in circumstances that affects the entity’s requirements or misunderstanding concerning nature of service originally requested would ordinarily be considered as reasonable basis for requesting a change in the engagement. However, a change would not be considered reasonable if it appeared that the change relates to information that is incorrect, incomplete or otherwise unsatisfactory.

The auditor should also consider legal or contractual implications of the change. In view of above, it would not be appropriate to accept the change in the assignment as the reason for change seems to be lack of availability of audit evidences.

Under what circumstances the auditor should not accept an audit engagement?

Audit engagement should not be accepted under following circumstances:

  1. Serious limitations on scope.
  2. Financial reporting framework is unacceptable.
  3. Management refuses to provide agreement that it acknowledges its responsibility as regards financial statements.

Enumerate some contents of the audit engagement letter

  1. Objective and scope of audit
  2. Responsibility of auditor
  3. Responsibility of management
  4. Applicable financial reporting framework
  5. Form and contents of reports to be issued
  6. The fact that because of the inherent limitations of an audit and internal controls, there is an unavoidable risk that even some material misstatements may not be detected
  7. Written representation from management
  8. Unrestricted access to books and records
  9. Fees and billing arrangements
  10. Involvement of other auditors and experts
  11. Involvement of internal auditors
  12. Communication with predecessor auditor
  13. Any obligations to provide audit working papers to third parties
  14. Audit of components.

List down the factors that are normally considered by an  auditor before accepting a new audit?

The auditor should consider that preconditions for the audit are present. Such matters include:

  1. Integrity of management
    Consider that the client is not engaged in illegal or unethical acts.
  2. Ability to serve the client
    Consider whether adequate resources and expertise would be
    available to carry out the audit.
  3. Acceptability. of financial reporting framework, i.e., a suitable criteria or benchmark for presentation and disclosure.
  4. Acknowledgement’ from management of its responsibility as regards financial statements.
  5. Compliance of ethical and independence requirements.
  6. Consider whether the appointment is legally valid in accordance with Companies Ordinance, 1984.
  7. Communicate with previous auditor.

Is it necessary for an audit firm to issue engagement letter every year in case of recurring audit? What are the factors to be considered in this regard?

Following factors are to be considered in sending engagement letter each year:

  1. Revision in the terms of engagement
  2. Change in reporting requirement
  3. Change in senior management
  4. Change in the size or nature of entity’s business
  5. Significant change in ownership.

You have been offered to audit an entity where management has not made any decision regarding the applicable financial reporting framework. Explain the importance of financial reporting framework at the client acceptance level.

Appropriate financial reporting framework is important because without such criteria management does not have an appropriate basis for preparation of financial statements and the auditor does not have a basis for forming an opinion.

The auditor of a parent company is also the auditor of its subsidiary. List the factors that the auditor should take into account while deciding whether a separate engagement letter should be sent to the subsidiary.

When the auditor of a parent entity is also the auditor of its subsidiary, the factors that influence the decision whether to send a separate engagement letter to the subsidiary include the following:

  1. Who appoints the auditor of the subsidiary?
  2. Whether the separate auditor’s report is to be issued on the subsidiary.
  3. Legal requirements.
  4. The extent of work performed by other auditors, if any. Degree of ownership by parent.
  5. Degree of independence of the subsidiary’s management.

Your firm has been the auditor of Mujahid Limited (ML) for many years. Before the commencement of the current year’s audit ML has requested that some changes be made in the terms of engagement.

Required

(i) What are the circumstances which may lead to changes in the terms of engagement?

(ii) Discuss the important points which should be considered before accepting the changes in the terms of engagement.

  1. The change in the terms of engagement may result from:

    I) a change in circumstances affecting the need for the service .

    II) a misunderstanding as to the nature of the audit or of the related service originally requested.

    III) a restriction on the scope of the engagement, whether imposed by management or caused by circumstances.

  2. In response to the request for change in the terms of the engagement the firm should consider the following:

    – Appropriateness of such a request for change by considering carefully the reason given by Mujahid Limited.

    – In case the change results in restriction on the scope of the engagement, the firm should assess whether or not it would be able to meet its statutory responsibility after the impositions ‘of such restriction.

    – A change in circumstances for a misunderstanding concerning the nature of service originally requested would ordinarily be considered a reasonable basis for requesting a change. A change would not be considered reasonable if it appears that the change relates to information that is incorrect, incomplete or otherwise unsatisfactory .

    – Before agreeing to change the terms of engagement the Auditor should consider any legal or contractual implications of the change to assess whether it would still be possible to carry out the audit in accordance with ISAs.

Posted on November 2, 2015 in Agreeing the Terms of Audit Engagements

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