Exam focus
covers aspects of running an accountancy firm such as winning new business and setting fees. Common requirements cover:
Matters to be included in a tender proposal.
Evaluating the suitability of an advertisement.
Factors to be considered when setting a fee.
Matters to be considered before accepting an engagement. Matters to be included in an engagement letter.
1 Changing auditors/professional accountants
Why change auditors?
Why step down?
Audit firms may not seek re-appointment for many reasons. Examples include:
Independence issues which cannot be safeguarded
Doubts regarding the integrity of the company’s management
Strategic decision such as concentrating on other services or markets.
2 Tendering
Tendering is the process of quoting a fee for work before the work is carried out.
Most tenders include a formal written document supported by an oral presentation. All presentations should be dynamic, professional and within the limits of the ethical framework.
Matters to consider before tendering
When invited to tender, a firm must decide whether it wishes to take part in the tendering process.
Specific risks of being involved with the tender include:
Wasted time if the audit tender is not accepted. The firm will not be paid for the time spent putting the tender proposal together.
Setting an uncommercial fee in order to win the contract (lowballing covered later in this ).
Making unrealistic claims or promises in order to win the contract.
Information required for the proposal
The preparation of an engagement proposal document is an important step in obtaining new work.
Prior to drafting any proposals an audit firm should consider the following:
What does the potential client expect from its auditors?
What timetable does the client expect: an interim audit followed by a final audit or a longer final audit after the year-end?
By which date are the audited financial statements required?
What are the company’s future plans, e.g. public flotation, expansion, contraction, concentration on certain markets?
Are there any perceived problems with the potential client’s current auditors?
The format required by the prospective client.
The content of the proposal
The content of the proposal should include:
The fee and how it has been calculated.
The nature, purpose and legal requirements of an audit (clients are often not clear about this).
An assessment of the requirements of the client.
An outline of how the audit firm proposes to satisfy those requirements and the assumptions made, e.g. on geographical coverage, deadlines, work done by client, availability of information, etc.
The proposed approach to the audit or audit methodology. An outline of the firm and its personnel.
procedures of the firm including those relevant to the engagement.
The ability of the firm to offer other services.
The selection process of the proposal
In 2015 in the UK, a survey of audit committees found that the selection process for tenders focused on:
Independence.
Judgment and scepticism of key audit partners. Evidence of internal and external quality reviews. Price was not the deciding factor.
UK syllabus
The UK Corporate Governance Code states:
The audit committee should have primary responsibility for making a recommendation on the appointment, reappointment and removal of the external auditors.
FTSE 350 companies should put the external audit contract out to tender at least every ten years (but can retain the current auditor if they provide the best quality and most effective audit), or explain in the annual report why they have not.
If the board does not accept the audit committee’s recommendation, it should include in the annual report, and in any papers recommending appointment or reappointment, a statement from the audit committee explaining the recommendation and should set out reasons why the board has taken a different position.
Benefits and drawbacks of tendering process Benefits
Firms are forced to look at ways of doing the work more efficiently to make the fee competitive.
Companies may look to improve their internal controls and increase the scope of their internal audit departments in order to reduce external audit costs.
Companies may simplify their group structures to reduce audit costs (among other reasons).
The threat of familiarity will reduce if tendering results in a change of audit firm.
Drawbacks
Greater market concentration, which has reduced market choice.
Loss of long-term relationships with auditors.
Focus on cost of the audit not quality. Lowballing issues.
The costs involved with the tendering process which affect both the company and the audit firm.
Test your understanding 1
You are an audit manager in Weller & Co, an audit firm which operates as part of an international network of firms. This morning you received a note from a partner regarding a potential new audit client:
‘I have been approached by the audit committee of the Plant Group, which operates in the mobile telecommunications sector. Our firm has been invited to tender for the audit of the individual and group financial statements for the year ending 31 March 20X3, and I would like your help in preparing the tender document. This would be a major new client for our firm’s telecoms audit department.
The Plant Group comprises a parent company and six subsidiaries, one of which is located overseas. The audit committee is looking for a cost effective audit, and hopes that the strength of the Plant Group’s governance and internal control mean that the audit can be conducted quickly, with a proposed deadline of 31 May 20X3. The Plant Group has expanded rapidly in the last few years and significant finance was raised in July 20X2 through a stock exchange listing.’
Required:
Identify and explain the specific matters to be included in the tender
document for the audit of the Plant Group. (8 marks)
3 Advertising and publicity
The ACCA Rulebook (section 250) states that it is acceptable in principle for ACCA members to advertise their services, but there is a general proviso that the advertising must not reflect adversely on:
the member the ACCA, or
the accountancy profession as a whole.
The aim of adverts should be ‘to inform, rather than impress’.
The rules state that advertisements and promotional material should not:
bring the ACCA into disrepute or bring discredit to the member, firm or the accountancy profession.
discredit the services offered by others whether by claiming superiority for the member’s own services or otherwise.
be misleading, either directly or by implication.
fall short of the requirements of any relevant national Advertising Standards Authority’s Code of Advertising Practice, notably as to legality, decency, clarity, honesty, and truthfulness.
Firms should be careful that the limited space available in an advertisement does not result in misleading information being communicated.
Promotional material may contain any factual statement which can be justified, but it should not make unflattering references to, or unflattering comparisons with, the services of others.
Restrictions on practice names and descriptions
There are restrictions on practice names and descriptions and the use of the ACCA logo given in the ACCA Rulebook (section B4).
Members’ descriptions
Members of the ACCA are entitled to call themselves Chartered Certified Accountants or just Certified Accountants, and may use the letters ACCA (as members) or FCCA (if they are fellows).
These descriptions may not be used in the registered names of companies. For example you may not set up a company called John Smith Certified Accountant Ltd.
Practice descriptions
An accountancy firm may describe itself as a ‘firm of Chartered Certified Accountants’, or a ‘firm of Certified Accountants’, or an ‘ACCA practice’ provided that:
– at least half of the partners (or directors) are ACCA members, and
– these partners (or directors) control at least 51 % of the voting rights under the firm’s partnership agreement (or constitution).
A firm in which all partners are ACCA members may use the description ‘Members of the Association of Chartered Certified Accountants’ on its professional stationery.
In the case of a mixed firm (e.g. some partners are ACCA members and others are members of other Chartered Accountancy bodies), the firm should not use the description ‘Certified Accountants and Chartered Accountants’ or similar, since this could be misleading.
Instead they may print the following statement on their stationery: ‘The partners of this firm are members of either the Association of Chartered Certified Accountants or (e.g.) the Institute of Chartered Accountants in England and Wales’.
Names of practising firms
Generally, members may practice under whatever name they want, but:
A practice name should be consistent with the dignity of the profession.
A practice name should not be misleading (e.g. a firm could not trade as
‘PQ International Accountants’ if all its offices were in one country).
A practice name should not run the risk of being confused with the name of another firm.
A sole practitioner should not add ‘and partners’ to the name under which he practices.
Use of the ACCA logo
A firm that has at least one ACCA member as a partner (or director) may use the ACCA logo (also called the ACCA ‘mark’) on its professional stationery and on its website.
The ACCA logo should be separate from the logo of the firm.
The positioning, size and colour of the ACCA logo should be chosen so that it is clearly recognisable.
The logo can be downloaded by members from the ACCA website in electronic format.
4 Fees
The need for guidance
The ACCA Rulebook (section 240) contains a number of important provisions in relation to fees in order to:
Minimise the possibility of a dispute between a member and their clients.
Ensure that the member behaves at all times in accordance with the fundamental principles.
Determinants for fee-setting
Members are entitled to charge a fair and reasonable fee for their services. This amount will be:
– The fee considered appropriate for the work undertaken
– The fee in accordance with the basis agreed with the client
– The fee by reference to custom in certain specialised areas. Members will usually consider the following matters in setting a fee:
– Seniority of the persons necessarily engaged on the work
– Time spent by each person
– Degree of risk and responsibility that the work entails
– Urgency of the work to the client
– Importance of the work to the client
– Overhead expenses of the firm.
The fee charged should include the recovery of any expenses properly incurred by the audit staff in the course of the engagement.
The general basis on which fees are normally computed should be communicated to clients or potential clients in the letter of engagement or proposal document in order to reduce the risk of misunderstandings.
Lowballing
Lowballing is the setting of a low price at the start of an arrangement in order to secure the business, with the intention of later raising it or recovering the losses made on that engagement with other, more lucrative, services.
This could lead to a self-interest threat as the auditor may try and keep their client happy simply in order to win other contracts with them.
Professional competence and due care may be affected if the low fee leads the firm to cut corners on the audit to try and minimise losses.
If a member is investigated following allegations of unsatisfactory work, an inappropriate fee quote may be taken into consideration during the disciplinary process. A reasonable and informed third party may perceive that insufficient time has been taken to do the audit and quality has been affected because of the low fee.
However, it should be noted that there is no evidence that lowballing has actually led to negligent auditing. The regulatory system and the desire of audit firms to maintain their reputation should be sufficient to maintain audit quality regardless of the fee. The cost of litigation and the fear of high profile public scandals is a significant deterrent.
Bases on which fees and commissions may be charged
Contingency fees
A contingency fee is an arrangement made at the outset of an engagement under which a predetermined amount or percentage is payable to the accountant upon the completion of a specified event, or the achievement of a particular outcome.
Contingency fees could lead to practitioners forcing a specific outcome that would not normally have been obtained to try and achieve higher fees. For example, tax fees may be agreed based upon the tax savings the practitioners create or an auditor may be paid for unusually rapid completion of an audit. This could lead to the engagement being conducted without necessary due care and objectivity.
The ACCA’s position is that fees should not be charged on a percentage, contingency or similar basis, except where that course of action is generally accepted practice e.g. insolvency work.
Fixed fee quotations
Most firms agree a fixed fee as clients prefer the certainty of a known cost. When determining the fee, the above factors will be taken into consideration. This arrangement can raise issues such as setting the fee at a low figure to secure the work or setting the fee at a level that is not profitable for the audit firm because of poor budgeting.
If a fee quoted is so low that it becomes difficult to perform the engagement in accordance with professional standards for that price, then an ethical threat to professional competence and due care may be created.
Safeguards may be applied to eliminate this threat or to reduce it to an acceptable level, for example:
Make it clear to the client which services are covered by the quoted fees and the basis upon which fees are to be charged.
Perform a rigorous budgeting process to ensure that costs can be recovered.
Assign sufficient time and appropriate staff to the assignment to ensure it is performed effectively.
Hourly rates
Alternatively, the accountancy firm can set an hourly rate for each grade of staff and invoice the client for the number of hours involved in the assignment. The final fee will only be known at the end of the engagement which may not be an acceptable arrangement for the client as they will not know how much to budget for the audit fee.
Referral fees
Members may pay a referral fee to a third party, in return for the introduction of a client. The payment of such a fee may create a self-interest threat, therefore safeguards should be established to eliminate the threat or reduce it to an acceptable level. This is usually achieved by disclosing any such arrangements to the client.
References to fees in promotional material
Where reference is made in promotional material to fees, the basis on which those fees are calculated, hourly or other charging rates, etc. should be clearly stated.
Members may make comparisons in their promotional material between their fees and the fees of other accounting practices, whether members or not, provided that any such comparison complies with relevant codes of conduct and does not give a misleading impression.
Promotional material that is based on the offer of percentage discounts on existing fees is permitted but must not detract from the professional image of the firm and the profession as a whole.
Members may offer a free consultation to potential clients, at which levels of fees will be discussed.
Current issue: Downward fee pressure
Ethical considerations relating to audit fee setting in the context of downward fee pressure
Pressure on an audit firm to reduce audit fees arises for several reasons:
Entities trying to reduce costs
Increased competition in the audit market
Mandatory audit firm rotation Increased audit threshold.
Reductions in fees can threaten the fundamental ethical principles of professional competence and due care, and objectivity.
A firm may quote whatever fee is deemed appropriate however, the firm must always ensure that the work is performed in accordance with professional standards and that the audit team have the appropriate expertise and experience taking into consideration the nature, size and complexity of the audit engagement. The firm should also recognise that some audits may be more challenging than others which will require an increase in the level of time and expertise needed.
Other stakeholders have an important role to play in ensuring that fee levels do not impair audit quality. In particular, those charged with governance (TCWG) should consider whether adequate time and resources are planned for the audit when negotiating audit fees. Management and TCWG should recognise that high quality audits are part of good corporate governance and therefore audits should not be viewed as a cost to be minimised.
Test your understanding 2
You are a training manager in Hawk Associates, a firm of Chartered Certified Accountants. The firm has suffered a reduction in fee income due to increasing restrictions on the provision of non-audit services to audit clients. The following proposals for obtaining professional work are to be discussed at a forthcoming in-house seminar:
- ‘Cold calling’ (i.e. approaching directly to seek new business) the
chief executive officers of local businesses and offering them free
second opinions. (5 marks)
- Placing an advertisement in a national accountancy magazine that includes the following:
‘If you have an asset on which a large chargeable gain is expected to arise when you dispose of it, you should be interested in the best tax planning advice. However your gains might arise, there are techniques you can apply. Hawk Associates can ensure that you consider all the alternative fact presentations so that you minimise the amount of tax you might have to pay. No tax saving – no fee!’
(6 marks)
- Displaying business cards alongside those of local tradesmen and service providers in supermarkets and libraries. The cards would read:
Hawk ACCA Associates
For PROFESSIONAL Accountancy, Audit,
Business Consultancy and Taxation Services
Competitive rates. Money back guarantees.
Required:
Comment on the suitability of each of the above proposals in terms of the ethical and other professional issues that they raise.
(Total: 15 marks)
5 Acceptance considerations
A firm should only take on clients and work of an appropriate level of risk. For this reason, the firm should perform ‘client screening’. The firm will consider the following matters before accepting a new engagement or client:
If there are any reasons why the firm believes they may not be able to issue an appropriate report, they should not accept the engagement.
Preconditions for an audit
ISA 210 Agreeing the Terms of Audit Engagements and the Code of Ethics and Conduct provides guidance to the professional accountant when accepting new work.
Before accepting (or continuing with) an engagement the auditor must establish whether the preconditions for an audit are present and that there is a common understanding between the auditor and management and, where appropriate, those charged with governance. [ISA 210, 3]
The preconditions for an audit are that management acknowledges and understands its responsibility for:
Preparation of the financial statements in accordance with the applicable financial reporting framework.
Internal control necessary for the financial statements to give a true and fair view.
Providing the auditor with access to all relevant information and explanations.
[ISA 210, 6]
If the client imposes a limitation on the scope of the auditor’s work to the extent that the auditor believes it likely that a disclaimer of opinion will ultimately be issued then the auditor shall not accept the engagement, unless required to do so by law. [ISA 210, 7]
Continuance
Once the engagement is complete, the audit firm must revisit the acceptance considerations again to ensure it is appropriate to continue for the following year. If any significant issues have arisen during the year such as disagreements with management or doubts over management integrity, the firm may consider resigning.
Acceptance considerations
Professional clearance
The prospective firm must contact the existing accountant to obtain professional clearance and determine whether there are any reasons that would preclude the accountant from taking on this engagement.
The prospective firm should:
Ask the client for permission to contact the existing auditor (and refuse the engagement if the client refuses).
Contact the outgoing firm, asking for all information relevant to the decision whether or not to accept appointment (e.g. overdue fees, disagreements with management, breaches of laws & regulations). This is also referred to as a professional etiquette letter.
If a reply is not received, the prospective firm should try and contact the outgoing firm by other means e.g. by telephone.
If a reply is still not received the prospective firm may still choose to accept but must proceed with care.
If a reply is received, consider the outgoing firm’s response and assess if there are any ethical or professional reasons why they should not accept appointment
The existing firm must ask the client for permission to respond to the prospective firm.
If the client refuses permission, the existing firm should notify the prospective firm of this fact.
[ACCA Rulebook, section 210]
Independence and objectivity
If the assurance provider is aware, prior to accepting an engagement, that the threats to objectivity cannot be managed to an acceptable level, the engagement should not be accepted.
Management integrity
If the firm has reason to believe the client lacks integrity there is a greater risk of fraud and intimidation.
Money laundering (client due diligence)
The firm must comply with Money Laundering Regulations which require client due diligence to be carried out. If there is any suspicion of money laundering, or actual money laundering committed by the prospective client, the firm cannot accept the engagement.
Resources
The firm should consider whether there are adequate resources available at the time the engagement is likely to take place to perform the work properly. If there is insufficient time to conduct the work with the resources available the quality of the work could be affected.
Risks
Any risks identified with the prospective client (e.g. poor performance, poor controls, unusual transactions) should be considered. These risks can increase the level of engagement risk, i.e. the risk of issuing an inappropriate report.
Fees
The firm should consider the acceptability of the fee. The fee should be commensurate with the level of risk.
In addition, the creditworthiness of the prospective client should be considered as non-payment of fees can create a self-interest threat.
Professional competence
An engagement should only be accepted if the firm has the necessary skill and experience to perform the work competently.
Reputation of the client
The firm should consider the reputation of the client and whether its own reputation could be damaged by association.
Additional professional work
Accountants may be asked to undertake work that is complementary or additional to the work of existing accountants, who are not being replaced.
Before accepting such work, the accountant should communicate with the existing accountants to inform them of the general nature of the work being done.
If permission is not given to communicate with the existing accountants, the engagement should be declined.
Test your understanding 3
Your firm has been approached by Tomlin Co to provide the annual external audit following the resignation of the previous auditor. The company’s year-end is 31 December which is the same as the majority of your firm’s other audit clients. Tomlin Co supplies goods to major retailers. Your firm does not audit any other retailers. The company is currently recruiting a new finance director after the previous finance director was found guilty of bribing customers in order to win major contracts.
Required:
Explain the matters to be considered in deciding whether to accept the
appointment as auditor of Tomlin Co. (6 marks)
6 Agreeing the terms of engagement
Contents
The auditor will agree the terms of the audit engagement with management or those charged with governance, as appropriate. [ISA 210, 9]
The terms are recorded in a written audit engagement letter and should include:
The objective and scope of the audit of the financial statements The responsibilities of the auditor
The responsibilities of 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.
[ISA 210, 10]
The content of the engagement letter should be agreed with the client before any engagement related work commences.
The client’s acknowledgement of the terms of the letter should be formally documented in the form of a director’s signature.
Engagement letter contents in detail
The items noted above should be included in every engagement letter. However the wider form and content of engagement letters may vary depending upon the nature of the client and the audit being conducted. In addition it may make reference to:
Applicable regulations, legislation, ISAs and ethical pronouncements.
The form of any other communications as a result of the engagement.
The inherent limitations of audit procedures.
Arrangements regarding the planning and performance of the audit.
The expectation that management will provide written representations.
The agreement of management to make available to the auditor draft financial statements and any accompanying information in time to allow the auditor to complete the audit in accordance with the timetable.
The agreement of management to make available to the auditor facts pertinent to the preparation of the financial statements, which management may become aware of during the period from the date of the auditor’s report to the date the financial statements are issued.
The basis upon which fees are computed and billed.
A request for management to acknowledge receipt of the engagement letter and to agree to the terms of engagement outlined therein.
Arrangements concerning the involvement of other auditors and experts (where relevant).
Arrangements concerning the involvement of internal auditors (where relevant).
Any restriction on the auditor’s liability, when such possibility exists.
Any obligations to provide audit working papers to other parties. [ISA 210, A24]
Changes to the engagement letter
The auditor should issue a new engagement letter if the scope or context of the assignment changes after initial appointment, or if there is a need to remind the client of the existing terms.
Reasons for changes would include:
Changes to statutory duties due to new legislation
Changes to professional duties, for example, due to new or updated ISAs
Changes to ‘other services’ as requested by the client.
[ISA 210, A30]
Audit of components of a group
Where the auditor of a parent company is also the auditor of a subsidiary, branch or division of the group, the audit firm must decide whether to issue a single engagement letter covering all the components, or a separate letter to each component.
If the audit firm sends one letter relating to the group as a whole, it is recommended that the firm should identify in the letter the components of the group for which the firm is being appointed as auditor.
7 After acceptance
New firm
Where an accountant is being appointed they should confirm that:
the outgoing auditor has vacated office in a correct manner
they have been properly appointed as the incoming auditor in accordance with relevant local legislation. This is usually achieved through a majority vote at the AGM, which should be documented in a formal minute.
Outgoing firm – transfer of information
Once a new accountant has been appointed, or on otherwise ceasing to hold office, the outgoing firm should return all books and papers belonging to the former client which are in the former accountant’s possession, whether the new accountant or the client has requested them or not, except where the former accountant claims to exercise a lien or other security over them in respect of unpaid fees.
In order to ensure continuity of treatment of a client’s affairs, the outgoing firm should provide the new accountant with all reasonable transfer information (last set of approved accounts and detailed trial balance) that the new accountant requests, free of charge.
Any information in addition to the reasonable transfer information is provided purely at the discretion of the former accountant, who may render a charge to the person requesting the information.
[ACCA Rulebook, section 210.26 – 210.29]
Approach to exam questions
In the exam you may be asked for the following:
Matters to consider before accepting an engagement / deciding whether to take part in the tender process
Matters to include in the tender proposal.
Matters to include in the engagement letter.
These requirements may look very similar but the answers to each of them are different. It is important to read the requirement carefully to make sure you understand which of these requirements is being asked so you can answer in the appropriate manner.
Matters to consider before accepting an engagement / deciding whether to take part in the tender process
Covered in section 5
This requirement could be set in the context of an audit or a non-audit engagement. The principles are the same for most engagements.
The firm should consider reasons why they would not want to accept the work (e.g. lack of integrity of management) and reasons why they cannot accept the work (e.g. not competent to perform the work).
This is a consideration for the accountancy firm. Only the conclusion of the decision is communicated with the prospective client.
Matters to include in the tender proposal
Covered in section 2
The purpose of tendering is to sell the firm’s services to the client. Think of the tender proposal as a sales pitch to the prospective client. The tender proposal will be given to the prospective client therefore it should only contain positive points. A prospective client does not want to hear a firm discuss whether it is competent to perform the work. If the firm does not have sufficient competence it should not be taking part in the tender process.
Matters to include in the engagement letter
Covered in section 6
This is the next stage along in the acceptance process. If the firm has decided to accept the engagement they will need to clarify terms and conditions in the engagement letter.
The engagement letter is used to minimise misunderstandings with the client therefore the matters in this requirement should be things the firm wants to make sure are not misunderstood e.g. who can rely on the report once it is issued, responsibilities of each party, how the fee will be calculated, deadlines, etc.
Test your understanding 4
AB Accountants has been invited to become the auditors of XY Co, a company with a poor reputation since several senior managers were convicted of corruption recently. The company is adamant that it has now changed its culture, and is hoping that AB Accountants will become its auditors as part of this new ethical outlook.
Required:
Identify possible safeguards AB Accountants might consider using.
(4 marks)
Test your understanding 1
Matters to be included in tender document
Outline of Weller & Co
A brief outline of the audit firm, including a description of different services offered, and the firm’s membership of an international network of audit firms. This should provide comfort to the Plant Group’s audit committee that Weller & Co has the capability to audit its overseas subsidiary, and that the audit firm has sufficient resources to conduct the Plant Group audit now and in the future, given the Plant Group’s rapid expansion.
Specialisms of Weller & Co
A description of areas of particular audit expertise, focusing on those areas of relevance to the Plant Group, namely the audit firm’s telecoms audit department. The tender document should emphasise the audit firm’s specialism in auditing this industry sector, which highlights that an experienced audit team can be assembled to provide a high quality audit.
Identify the audit requirements of the Plant Group
An outline of the requirements of the client, including confirmation that Weller & Co would be providing the audit service to each subsidiary, as well as to the parent company, and to the Plant Group. Weller & Co may also wish to include a clarification of the purpose and legal requirements of an audit in the jurisdictions of the components of the Plant Group, as requirements may differ according to geographical location.
Identify any audit-related services that may be required
Due to the Plant Group’s listed status, there may be additional work to be performed. For example, depending on the regulatory requirements of the stock exchange on which the Plant Group is listed, there may be additional reporting requirements relevant to corporate governance and internal controls. This should be clarified and included in the tender document to ensure that the audit committee understands any such requirements, and that Weller & Co can provide an all-encompassing service.
Audit approach
A description of the proposed audit approach, outlining the stages of the audit process and the audit methodology used by the firm. Weller & Co may wish to emphasise any aspects of the proposed audit methodology which would be likely to meet the audit committee’s requirement of a cost effective audit. The proposed audit approach could involve reliance to some extent on the Plant Group’s controls, which are suggested to be good, and the tender document should explain that the audit firm will have to gauge the strength of controls before deciding whether to place any reliance on them.
Deadlines
The audit firm should clarify the timescale to be used for the audit. This is very important, given the audit committee’s hope for a quick audit. It would be time pressured for the audit of all components of the Plant Group and of the consolidated financial statements to be completed in two months, especially given the geographical spread of the Plant Group. The audit firm may wish to propose a later deadline, emphasising that it may be impossible to conduct a quality audit in such a short timeframe.
and ethics
Weller & Co should clarify its adherence to the Code of Ethics and to International Standards on . This should provide assurance that the audit firm will provide an unbiased and credible auditor’s report. This may be particularly important, given the recent listing obtained by the Plant Group, and consequential scrutiny of the financial statements and auditor’s report by investors and potential investors.
Fees
The proposed audit fee should be stated, with a breakdown of the main components of the fee. The audit firm may wish to explain that the audit fee is likely to be higher in the first year of auditing the Plant Group, as the firm will need to spend time obtaining business understanding and ensuring there is appropriate documentation of systems and controls. The tender document could explain that the audit is likely to become more cost effective in subsequent years, when the audit firm has gone through a learning curve.
Additional non-audit services
The audit firm should describe any non-audit services that it may be able to provide, such as tax services or restructuring services, which may be relevant given the rapid expansion of the Plant Group. The provision of such services would have to be considered carefully by the audit firm due to the threat to objectivity that may be created, so the tender document should outline any safeguards that may be used to reduce risks to an acceptable level. This is particularly important, given the listed status of the Plant Group. This part of the tender document may remind the audit committee members that corporate governance requirements may prohibit the audit firm from offering certain non-audit services.
Test your understanding 2
A good working knowledge of the professional codes is required here and an ability to apply them. However, it should be helpful to identify issues which common sense would indicate do not sit comfortably with a professional approach.
- Cold calling
Tutorial note: Recognising that there are three issues to address (i.e. ‘cold calling’, ‘free’ and ‘second opinions’) is likely to earn more marks than focusing on just one.
– Cold calling is prohibited in certain countries, therefore the direct approach may not be suitable. Where cold-calling is allowed, it may still only be permitted for existing business clients (i.e. to offer them additional services). The direct approach to non-business clients may still be prohibited.
– The fundamental ethical principles must be adhered to. Whilst solicitation which is decent, honest and truthful may be acceptable, cold calling which amounts to harassment is not.
– Offering a service for free is not prohibited provided that the client is not misled about future levels of fees.
– There are strict ethical codes regarding second opinions (on accounting treatments). Practitioners are advised NOT to provide second opinions, when requested, without following a procedure of contacting the incumbent auditor/accountant.
Tutorial note: Second opinions should only be given where the auditor has been given permission to speak to the original auditor to ascertain the information available to them at the time of their report. The second auditor should not consider any information that became available subsequently.
- Tax planning
– Advertising is generally allowed subject to the observance of the fundamental ethical principles.
– Where advertising is permitted, the minimum requirements are that it be decent, honest, truthful and in good taste. These criteria may not be met in this proposal.
– ‘The best tax planning advice’ is likely to be a self-laudatory statement and not based on verifiable facts. This may be an unjustifiable claim of expertise or specialism in the field of tax. This may also be making an unjustifiable comparison with other professional accountants in public practice.
– ‘Can ensure …’ and the assertion of ‘all’ may not be a supportable claim, therefore the advertisement is not honest in this respect.
– There is a fine line between tax avoidance and tax evasion and ‘techniques you can apply’ and ‘alternative fact presentations’ may lean toward the latter and so not be in keeping with the integrity of the profession. This statement may imply an ability to influence taxation authorities.
– The assertion of being able to ‘minimise the amount of tax’ may expose Hawk Associates to litigation. The engagement risk associated with taking on this work would be high and so should carry commensurately high fees. Expectations of favourable results (lower tax liabilities) may be unjustifiable or created deceptively.
– The ‘no tax saving – no fee’ offer does not compensate for the risk associated with undertaking the work advertised. Contingency fees, whereby no fee will be charged unless a specific result is obtained, are prohibited except for certain services such as insolvency.
- Business cards
– Business cards may be considered a form of stationery and should be of an acceptable professional standard and comply with legal and member body requirements concerning names of partners, principals, professional descriptions, designatory letters, etc.
– Whilst placing such an advertisement where a target audience might reasonably be expected to exist (e.g. in an Institute of Directors), displaying it alongside local tradesmen may appear to belittle the status of professional accountants.
– An advertisement the size of a business card would be sufficient to provide a name and contact details and in this respect is suitable. However, the danger of giving a misleading impression is pronounced when there is such limited space for information.
– The tone of the advertisement may discredit the ACCA name. It is also unsuitable that it seeks to take unfair advantage of the ACCA name. Although the ACCA mark can be used by Hawk Associates on letterheads and stationery (for example) it cannot be used in any way which confuses it with the firm.
– The emphasis on ‘professional’ may be unsuitable as it could suggest that other firms are not professional.
– It is unlikely that any professional would offer money back. In the event of dispute (e.g. over fees), the matter would be taken to arbitration (with their member body) if a satisfactory arrangement could not be reached with the client. A tradesman may guarantee the quality of his work and that it can be made good in the event that the customer is not satisfied. However, an auditor cannot guarantee a particular outcome for the work undertaken (e.g. reported profit or tax payable). Most certainly an auditor cannot guarantee the truth and fairness of the financial statements in giving an audit opinion.
Test your understanding 3
Reason for the previous auditor resigning
If they have resigned due to difficulties encountered during the audit, the firm may be concerned that the same issues could occur.
Resources
As Tomlin’s year-end is the same as most other audit clients, the firm may not have sufficient audit staff available to assign to the audit. This may lead to the work being rushed which could affect the quality of the audit.
Competence
As the firm does not audit any other retailers the company may not be sufficiently experienced to deal with such an audit. The firm may not understand the industry laws and regulations and the risks associated with that industry which increases audit risk.
Absence of a finance director
Without a finance director, the financial reporting processes are not being overseen by anyone. The financial statements may not be prepared on time and difficulties could be encountered by the audit team obtaining audit evidence causing work to be rushed to get it finished and material misstatements going undetected.
Bribery
The previous FD was found guilty of bribing customers. This also indicates high control risk and may cast doubt over the integrity of management if other directors were aware of the bribery. The audit firm may decide the engagement is too risky to accept.
Independence
The firm would need to confirm independence from the client. Ethical threats such as self-interest and familiarity should be considered, and whether effective safeguards could be applied. Where effective safeguards cannot be applied, the engagement should be declined.
Fees
The level of the fee should be considered and whether the fee is acceptable for the amount of work involved and the level of risk associated with the engagement.
Test your understanding 4
AB Accountants must weigh up the possible costs and benefits of accepting nomination. The firm may wish to apply safeguards such as:
Performing client due diligence in accordance with money laundering regulations.
Obtaining a detailed knowledge of the client before accepting nomination.
Securing the client’s commitment to implement strong internal controls and the highest standards of corporate governance.
Allocating the senior partner of the firm to be the engagement partner rather than a more junior partner.
Performing an engagement review.
If the firm does not believe that any such safeguards could reduce the threats to an acceptable level, then the firm should decline nomination.
Test your understanding 5
Deidre Jones is entitled to inform the public of her skills (e.g. advice for small businesses, business start-ups, etc.) but claiming that she offers the best service in the area discredits the services offered by other accountants.
The smiley symbols are not consistent with an image of professionalism and should be replaced.
She should state a business telephone number or physical address in the advertisement, not just a web address.
Nowhere in the advertisement does Deidre Jones state that she is an accountant (although the ACCA designation states this for those who know what it means). If this advertisement is to be included in a directory of accountants, there is no need to include this point. However, if the advertisement is to go into a general publication, it is probably best to clearly state the fact that Deidre Jones is a certified accountant or chartered certified accountant (as well as including the ACCA designation after her name).
Deidre is also not permitted to use the term ‘ACCA’ in her web address as this indicates that she works for them, when in fact she is simply a professional member of the ACCA.
