Chapter 6

Question 1

What is a tender?

Answer 1

This is a bid for an engagement

Question 2

What must the auditor do in a tender to win the client?

Answer 2

Set out your firms attributes that they posses to make them the best placed to carry out the engagement

Indicating their fee

Question 3

What is an important issue to consider with tendering

Answer 3

“Lowballing” - When a firm charges less than the market rate for the audit

Question 4

What does the ICAEW code of ethics say on lowballing?

Answer 4

That it is not unethical. But safeguards should be put in place as the introduction of lowballing results in an increase in self interest threat

Question 5

What does the ICAEW code of ethics say on fee computation when tendering?

Answer 5

The computation should be disclosed with reference to factors such as the professional experience, time spent on job, and the risk and responsibility the work entails etc.

Question 6

Purpose of assurance firms carrying out risk analysis?

Answer 6

• Is the fee high enough in comparison to the risk?
• lay out foundations for understanding the risks associated with the engagement if it is taken on and the amount of work that will have to be undertaken to reduce assurance risk to an acceptable level for the assignment.

Question 7

Why is the perceived risk important when it comes to money laundering for e.g.

Answer 7

If a fraudster knows the auditors don’t do too much work at a client as the risk is deemed low… They may view the lack of checks as a good opportunity to commit fraud/ML in that co..

Question 8

When carrying out risk, what are the assurance providers trying to determine?

Answer 8

• Whether the directors/management of the co. appear to have integrity e.g. look at accounting policy of co.
• Whether the co has good financial record, resources and outlook. e.g. look at financial performance
• Whether the company appears to have good internal control, or at minimum a good control environment. e.g. internal audit committee?
• Whether the company has unusual transactions.

Question 9

What would be classified as a low risk client?

Answer 9

• directors have integrity
• financial record is strong
• good attitude to internal controls
• few unusual transactions

Question 10

what if the client is deemed as high risk?

Answer 10

doesn’t mean wont accept. but preliminary risk assessment will be incorporated in to audit procedures when risk assessment indentification and procedures are carried out on the engagement

Question 11

What is an auditor required to do at the start of an engagement with a client?

Answer 11

They should carry out due diligence with respect to money laundering on a client.

Question 12

What should the auditor consider when deciding whether to accept an engagement?

Answer 12

• The results of the risk analysis
• Whether there are any ethical barriers to acceptance
• whether the audit firm has enough experience and resources
• whether all legal requirements associated with the appointment of the incoming auditors and the removal or resignation of the outgoing auditors have been met.

Question 13

If you are approached (as an auditor) by a prospective client, what steps should you take?

Answer 13

You should gain written approval by the client to discuss the existing affairs with the prospective auditor. The prospective auditor should then write to the existin auditor asking for reasons as to why they should/should not accept the audit engagement

Question 14

What should a prospective auditor do should they not recieve a response from the existing auditor?

Answer 14

They should write to the existing auditor (wtih a time stamped letter) again telling them of their intention to accept the audit, and deem that the lack of response is an indication of no adverse comments.

Question 15

If you are an existing auditor with a letter from a prospective auditor, what should you do?

Answer 15

Gain approval from client to disclose info to prospective auditor.
Disclose information that is of a concern, and taking care not to “tip off” etc.

Question 16

What should you do if the client denies you (as the existing auditor) the right to talk to the prospective auditor?

Answer 16

You should write to the prospective auditor and make them aware of this.

This will allow the prospective auditor to consider the impact of this on their decision to accept the audit or not.

Question 17

If you (as client) have an auditor come in to perform additional work to that of the existing auditor, what should you do?

Answer 17

Ensure that the existing auditor is aware of the nature of the additional work to be undertaken, and an opportunity given to the external auditor to provide communication to ensure the work is carried out effectively.

Question 18

What if the members want to remove an auditor? How do they do this?

Answer 18

They can do so by using a “special note” at a general meeting. In which the auditors should have an opportunity to address or speak at.

Question 19

In practice, how do auditors tend to be replaced?

Answer 19

Directors decide on this, but they must make sure that the members vote it through at a general meeting

Question 20

What is the process of “opinion shopping”?

Answer 20

This is where directors shop around and find an auditor with opinions that are aligned with theirs.

Question 21

If replacing an auditor, what is an auditor entitled to as per company law?

Answer 21

They have the right to make written representation to members and speak at the meeting at which the resolution is voted on.

Question 22

What are the rights of the auditor if it is decided that they will resign?

Answer 22

• right to call general meeting to explain their reason (statement of circumstances)
• Right to request board to circulate reason before attending the meeting.

*Note even if auditor isn’t reappointed they should release a statement of circumstances

Question 23

Is it possible for an auditor to not deposit a statement of reasons when they cease to be the external auditor of a public listed entity?

Why is this an issue?

Answer 23

This is not an option. The companies act doesn’t allow for an auditor to depart without reason.

This is an issue as the external auditor may want to leave because they believe something is wrong, and thus struggles to leave without telling its members.

Question 24

ISA for ELs?

Answer 24

ISA 210 Agreeing the Terms of the Audit Engagements

Question 25

What should an EL include?

Answer 25

• objective and scope of the audit
• managements responsibilities.
• auditors responsibilities
• avoid misunderstanding between two parties
• written confirmation of acceptance
• ## statutory and professional responsibility to gain this.

Question 26

When should a new EL be issued?

Answer 26

Does not need to be every year, but should be considered yearly.

Question 27

What would indicate that a new EL is required?

Answer 27

• Indications that the client misunderstands the terms of the engagement
• revised or special terms of the engagement
• a recent change in the senior management or the directors
• a significant change in ownership of the company
• a significant change in the nature or size of the company
• Legal or regulatory requirements
• change in financial reporting framework in prep of FS
• a change in other reporting requirements

Question 28

What if the auditor and the client cannot agree on the terms of the engagement letter?

Answer 28

The auditor should withdraw from the audit.

Question 29

Is it a requirement to disclose the terms of the engagement between the two partieS?

Answer 29

This is not a requirement.