The most common way of obtaining an audit engagement is by recommendation. It is not uncommon for upto 90% of a firm's new business to come from it's existing client base.
However, the second most common way of obtaining new work is by submitting a successful tender, after being invited to participate in what is frequently referred to as a 'beauty parade'.
'Tendering' is the process of quoting a fee for work before the work is carried out.
Risks associated with Tender Process:-
In addition to the risk associated with any other new client the specific risks of being involved with the tender include:
- Wasted time - if the auditor tender is not accepted.
- Setting an un commercially low fee in order to win the contract ( low balling, discussed above )
- Making unrealistic claims or promises in order to win the contract.
- Predecessor Auditor :- Contact the outgoing auditor, asking for any professional reasons why they should not accept appointment (if client has caused problems, you may wish to say not to the appointment). If a reply is not recieved, the prospective auditor by other means e.g. by telephone or in person. Even if there are professional reasons or if a reply is still not recieved, the prospective auditor may still choose to accept but must proceed with care and be alert to increased risk.
- Client Screening:- Client screening procedures are designed to screen out potenially risky audit clients.
- Depressed economic sector ( b/c your fees will not be recovered)
- Client previous audit history (frequent changes of auditor, qualified reports are obvious bad news)
- General abilities of the management
- Management refusal to examine significant documents, such as information about directors.
Practical Factors:-
- A strategic decision of an audit firm for example not to do the audit of certain companies.
- Lack of resources (small/medium size audit firms).
- Ensure that the legal requirements in relation to the removal of the previous auditors & the appointment of the firm have been met.
- Temporary suspention of an audit firm by the regulator.
- Ratings of audit firms (only for financial industry).
- Integrity: Members should be straight forward and honest in all professional and business relationships e.g. there is no invigilation in your exam, it depends on you to be honest or not.
- Objectivity: The principle of objectivity imposes an obligation on all professional accountants not compromise their professional or business judgement becaus of nias, conflict of interest or the undue influence of others.
- Confidentiality: A professional accountant should maintain confidentiality even in a social enviornment. The professional accountant should be alert to the possibility of inadvertent disclosure, particularly in circumstances involving long association with a business associate or a close or immediate family member. There are a small number of situations where auditors may decide, or may be forced by law, to pass client information to a 3rd party.
- client is suspected of terrorism.
- client is suspected of treason.
- The ACCA are investigating your work.
- A court order is obtained requiring you to disclose.
- client gives permission.
- The auditor feels it is in the public interest to know.
- To maintain professional knowledge and skill at the level required to ensure that clients or employers recieve competent professional service : and
- To act diligently in accordance with applicable technical and professional standards when providing professional services.
- Attainment of professional competence: and
- Maintenance of professional competence.
This includes actions which a reasonable and informed third party, having knowledge of all relevant information, would conclude negatively affects the good reputation of the profession.
Consent Letter:-
Once the tender has been evaluated by the audit firm, and if the firm considers proceeding with response to the tender on the basis of evaluation of cost(fees) and practical issue, the audit firm sends a CONSENT letter, written to the client management.
Evaluation of Consent Letter:-
On the receipt of the response to tender, the client management, evaluate the response to tenders, and short list the audit firm, to be tabled the AGM for shareholders approval. While deciding which firm to be shortlisted the management gives due to weight to the cost(audit fees), the quality of audit firm, its market standing and experience to carry out the audit in relevance to their size and complexity.
(Short listing process of audit firm possess an ethical problem, commonly referred to as OPINION SHOPPING, so we overcome this problem by the involvement of Audit Committee).
Approval & Appointment of Audit Firm @ AGM:-
At the AGM the shareholders votes for the short listed audit firms and the firm getting the majority of votes from the members present in person or through proxy, is appointed as the auditor.
On appointment, the client management sends an appointment letter, as a documentary evidence of appointment of the audit firm by shareholders.
AUDIT ENGAGEMENT LETTER:-
Audit engagement Letter(AEL) is letter, which contains the terms & conditions on the basis of which the audit will be carried out. This letter is wriiten by the audit firm (engagement partner) to the client (board of directors) before the start of the audit engagement, so that the terms are agreed between both the parties prior to the start of audit services.
Terms of Audit Engagement Letter
- The Objective and Scope of the audit of the financial statements.
- The responsibilities of the auditor.
- The responsibilities of the management.
- Identification of the applicable financial reporting framework for the preparation of the financial statements.
- 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.
- Arrangements regarding the planning and performance of the audit, including the composition of the audit team.
- The agreement of management to make available to the auditor draft financial statements and any accompanying other information in time to allow the auditor to complete the audit in accordance with the proposed time table.
- The agreement of management to inform the auditor of facts that may affect the financial statements, of which management may become aware during the period from the date the financial statements are issued.
- The bases on which fees are computed and any billing arrangements.
- A request for management to acknowledge receipt of the audit engagement letter and to agree to the terms of the engagement outlined therein.
- The expectation that management will provide written representations.
- Arrangements concerning the involvement of other auditors and experts in some aspects of the audit.
- Arrangements concerning the involvement of internal auditors and other staff of the entity in some aspects of the audit.
- Arrangements to be made with the predecessor auditor, if any, in the case of an initial audit.
IFAC categorises threats in to five types. These are threats towards the fundamental principles of auditing, of which OBJECTIVITY is one.
- Self-Interest - these arise from a result of financial interest.
- Self-review - these occur when a previous judgement needs to be re-evaluated.
- Familiarity - these occur due to close personal relationships which allows the auditor to become too sympathetic to others.
- Intimidation - these arise when the professional accountant feels threatened, which prevents acting objectively.
- Advocacy - these threats arise when the position of the client is promoted so that subsequent objectivity is compromised.
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