ISA 200 sets out the ethical principles governing the auditor’s professional responsibilities. One of them is professional behaviour. A member is expected to comply with relevant laws and regulations and should avoid any action that discredits the profession.
Now, auditors are like anyone else in business and in business it is necessary to advertise. But this advertising should be aimed at informing the public in an objective manner and should be in good taste.
The Institute of Certified Public Accountants of Rwanda have stated they will use the IFAC code of ethics as their basis and thus imply that in promoting themselves and their work, members should be honest and truthful and should not make any exaggerated claims for the services they are able to offer, the qualifications they possess or the experience they have gained. In addition, they should not make any disparaging references or unsubstantiated comparisons to the work of others.
Use of logos
Persons can only use the designated letters of a profession after their name such as in advertisements when they are members of the said profession.
A firm must have a practicing/auditing certificate to describe themselves as registered auditors.
If reference is made in promotional material to fees, the basis on which the fees are calculated should be stated. The greatest care should be taken to ensure that any reference does not mislead as to the precise range of services and time commitment that the reference is intended to cover.
The danger of giving a misleading impression is great when there are constraints in respect of space limits for advertisements. It is for this reason that it is generally inappropriate to advertise fees. It is probably better to advertise free consultations to discuss fee issues.
Client companies can change auditors. In this regard a firm may be approached to submit a tender for an audit. When approached to tender, an audit firm must consider whether they want to do the work and they must have regard for the ethical considerations, such as independence and professional competence. In addition, they need to consider fees and some other practical issues.
A member may quote whatever fee is deemed to be appropriate. The fact that one may quote a lower fee than another auditor is not in itself unethical. However, it does raise the risk of a threat to the principles of professional competence and due care in that the fee quoted may be so low as to make it appear to be difficult to perform the audit to the expected standards.
Therefore, it is wise to set out the basis of the calculation of the fee. The following factors should be considered when setting out a fee:
- What does the job involve. Is it audit and/or tax or is there some other complicated work involved.
- Which staff will need to be involved, numbers and quality. How long will they be required. Is the nature of the business complex.
- What charge out rates are to be applied.
The practice of undercutting fees has been called lowballing and can be seen in action generally where large audits are concerned. We have seen that having a lower fee may seem to have a negative impact on an auditor’s perceived independence but there are other factors to be considered:
- Auditors operate in a market like any other business where supply and demand very often dictate the price.
- Fees may be lower due to reasons such as better internal audit functions and simplified group structures within client companies.
- Auditing firms have increased productivity, whether through the use of more sophisticated IT or experience gained through understanding the client’s business.
It is important that the auditor also considers a number of other issues:
- Can the audit assignment be fitted in to the audit firms current work plan.
- Is their suitable audit staff
- Will any specialist skills be required. What are the future plans for the company.
- Is there any training required for current staff and what will be the cost of that training.
- What work does the client actually want. Audit and/or tax.
- Is this the first time the company has been audited.
- Whether the client is seeking to change its auditors and if so what is the reason behind it.
Submitting an audit proposal
There is no set format. In fact, the client may dictate the format whether it be a written submission or a presentation to the board of directors.
Whatever the form of the tender submission, the following matters should be included in the proposal:
- The audit fee and the basis for its calculation
- An assessment of the needs of the client
How the firm means to meet the needs of the client
Any assumptions made to support the proposal
- The audit approach to be adopted by the firm
- A brief outline of the firm
- Details and background of the key audit staff on the proposed engagement.
Evaluating the tender
Different clients will have different ways of evaluating a tender. Some of the more general points are listed below. It is important to bear these in mind when preparing a proposal:
- Fee. This can be the most vital point. Some clients go straight to this figure and don’t even bother with the rest of the document.
- Professionalism. Auditors are expected to be professional. Remember, the audit team and the tender documents are often the first factors on which a prospective client forms an impression.
- Proposed audit approach. Clients are always looking for the least amount of disruption to their already busy schedules, so the shortest number of days on-site may be the key to winning a tender.
- Personal service. Fostering relationships is vital. Client should always feel he is getting value for money.
You have submitted a tender. You have been successful and the client has offered you the audit. Before you accept and commence the audit you should carry out a number of procedures in order to comply with the provisions in ISQC1 quality control (section 26 to 28).
Before accepting the assignment
- Make sure there are no ethical issues which would prevent you from accepting this assignment.
- Make sure that you are professionally qualified to carry out the work requested and that your firm has the resources available in terms of staff, expertise and time.
- Check out references for the directors of the client firm especially if they are unknown to the audit firm.
- Consult previous auditors as a matter of professional courtesy and establish from them whether there is anything that you ought to know about this vacancy.
After accepting the assignment
- Make sure the resignation of the previous auditors has been properly carried out and that the new appointment is valid. A resolution by shareholders of the company is required.
Submit a letter of engagement to the directors of the client company and ensure it is accepted and signed before any audit work is carried out.
ISQC1 states that a firm should establish policies and procedures for the acceptance and continuance of client relationships and specific engagements, designed to provide it with reasonable assurance that it will only undertake or continue relationships and engagements where it:
- Has considered the integrity of the client and does not have any information that would lead it to conclude that the client lacks integrity,
- Is competent to perform the engagement and has the capabilities, time and resources to do so and
- Can comply with the ethical requirements.
The firm should obtain such information as it considers necessary in the circumstances before accepting an engagement with a new client, when deciding whether to continue an existing engagement and when considering acceptance of a new engagement with an existing client.
Where issues have been identified and the firm decides to accept or continue the relationship or a specific engagement, it should document how the issues were resolved.
In short, a firm must:
- Obtain relevant information
- Identify relevant issues
- Resolve issues that are identified, and document that resolution.
Integrity of client
Matters to be considered:
- Identity and business reputation of owners, key management and those charged with governance.
- Nature of the client’s operations and its business practices.
- Attitude of the owners, key management and those charged with governance towards matters such as aggressive interpretation of accounting standards and the internal control environment.
- Client’s attitude to fees.
- Indications of inappropriate limitation in the scope of work.
- Indications that client may be involved in money laundering or other criminal activities.
- Reasons given for non-reappointment of previous auditors.
Information can be gathered through communications with previous auditors or other professionals who may have provided services and through other third parties such as bankers, legal counsel and industry peers. There are also a multitude of relevant databases where one can do some background research.
Competence of the firm
Matters to be considered:
- Has the firm got sufficient knowledge of the relevant industry and the relevant regulatory environment.
- Are there sufficient personnel within the firm having the necessary capabilities and competence and are experts/specialists available when needed.
Are competent individuals available to perform engagement quality control reviews. Will the firm be able to complete the engagement within the reporting deadline.
- Where a potential conflict of interest is identified, the firm should consider whether it is appropriate to accept the engagement.
- Need to consider any significant matters that may have arisen during the current or previous engagements of whatever description.
ISQC1 goes on to state that where the firm obtains information that would have caused it to decline an engagement if that information had been available earlier, policies and procedures (on the continuance of the engagement and the client relationship) should include consideration of:
- The professional and legal responsibilities that apply to the circumstances, including whether there is a requirement for the firm to report to the person or persons who made the appointment or, in some cases, to regulatory authorities, and
- The possibility of withdrawing from the engagement or from both the engagement and the client relationship.
Some suggested procedures would include discussing with appropriate client management the appropriate action that the firm might make based on the relevant facts and circumstances. Also, the firm should document the significant issues, consultations, conclusions and the basis for those conclusions.
- AGREEING THE TERMS
Once an engagement has been accepted it is important to agree the terms. It is essential that both parties fully understand what the agreed services are. Any misunderstanding could lead to a breakdown in the relationship and could result in legal action.
ISA 210: terms of audit engagements establishes standards and provides guidance on:
- Agreeing the terms of an engagement with the client and
- The auditor’s response to a request by a client to change those terms to one that provides a lower level of assurance.
It states that the auditor and the client should agree on the terms of the engagement. The agreed terms would need to be recorded in an audit engagement letter or other suitable form of contract. The terms should be recorded in writing.
The objective and scope of an audit and the auditor’s obligations may be established by law, but the auditor may still find that an audit engagement letter will be informative for their clients.
The main points to be clarified in the letter of engagement would include:
- Confirmation of the auditor’s acceptance of the appointment.
The auditor is responsible for reporting on the accounts to the shareholders
The directors of the company have a statutory duty to maintain the books of the company and are responsible for the preparation of the financial statements. The directors are responsible for the prevention and detection of fraud.
- The fact that because of the test nature and other inherent limitations of an audit, there is the unavoidable risk that some material misstatements may remain undiscovered.
- The scope of the audit including reference to appropriate legislation and standards.
- There should be unrestricted access to whatever books and records the auditor needs in the performance of his duties.
Other points to be included:
- Arrangements regarding the planning and performance of the audit.
- The expectation of receiving from management written confirmation regarding representations made in connection with the audit.
- Request for the client to confirm in writing the terms of the letter.
- The fee to be charged and the credit terms.
- The form of any reports or other communication of results of the engagement.
- On recurring audits, the auditor should consider whether circumstances require the terms of the engagement to be revised and whether there is a need to remind the client of the existing terms of the engagement.
- An auditor who, before the completion of the engagement, is requested to change the engagement to one which provides a lower level of assurance, should consider the appropriateness of doing so. Where the terms are changed, both parties should agree on the new terms. Note, the auditor should not agree to a change of engagement where there is no reasonable justification for doing so.
- BOOKS AND DOCUMENTS
ISQC1 states that the firm should establish policies and procedures for the retention of engagement documentation for a period sufficient to meet the needs of the firm or as required by law or regulation.
Unless otherwise specified by law or regulation, engagement documentation is the property of the audit firm. The firm may, at its discretion, make portions of, or extracts from, engagement documentation available to clients, provided such disclosure does not undermine the validity of the work performed, or, in the case of assurance engagements, the independence of the firm or its personnel.
Audit working papers belong to the auditor and cannot be taken over by another set of auditors taking over the audit assignment. In practice, the previous auditors provide the new auditors with enough carry over information such as the lead schedules behind the make up of the financial statements.
The auditor owes a duty of confidentiality to the client, so documents about the client should not be given to third parties unless:
The client agrees to the disclosure
The disclosure is required by law or court order
Disclosure is otherwise in accordance with the rules of professional conduct.
The previous auditors should ensure that all the books and documents belonging to the client are returned promptly. In some cases, the previous auditors are allowed to keep the books where they are exercising a lien. This is a suppliers right to retain possession of a customer’s property until the customer pays up what is owed.
There are strict conditions when this can be enforced:
- The books and documents must actually belong to the client
- The auditor must have got them by proper means
- The actual work must have been done and a fee note raised and given to the client
- The fee must relate to the held documents.
Financial statements and tax compliance work belong to the client, even if the auditor/accountant has prepared them.
F. CHANGE IN AUDITORS
Companies do actually change their auditors. It is important that auditors understand why a company may seek to change their auditor in a bid to prevent this from happening to them. The following sets out the reasons why this can happen:
Many companies perceive that an audit has very little value. In turn this makes the audit fee a very sensitive issue.
- The fee may be perceived to be too high. Remember, a lot of the audit work may be done off site and the hours charged at the firms office will belong to the managers and partners, so the client might not understand why the fee is so high.
- It may not be seen as good value for money. For example, a client may have important tax work carried out for him. The fee charged may be way lower than that of the audit, probably due to the time involved, yet the client might see the value of this work far greater than that of the audit.
- The current fee might not appear to be very competitive. Other similar firms may be getting audit services for less.
- The client may put the audit out to tender to see whether the price is actually negotiable, even though he may have no intention of changing his auditor.
- The audit fee may breach the recommended level of overall practice fees as laid down by ethics and auditor may have no other alternative but to resign.
Audit firm may not seek re-election
- The auditor may choose not to stand for ethical reasons, such as he doubts the integrity of management
Conflicts of interest may have arisen such as competition between clients or maybe he has been offered some lucrative work by the client and he may have to resign the audit The auditor may have a disagreement with the client such as in the formulation of accounting policies
The auditor may simply not want to reduce his audit fee.
Size of the company
- The company may be growing at such a rate that the audit firm no longer has the necessary resources, staff, time, and expertise, to allow it to retain the audit. Remember the principle of professional competence and due care.
- Alternatively, the company may be constricting and it now finds that it can avail of the audit exemption specified under relevant jurisdiction regulations.
- There is very little that the auditor can do in each of these cases.
- With small companies, the audit is almost a personal service. If the relationship breaks down, there may be no where to go except discontinue the relationship. Within a big firm with big audit clients, you could simply change the engagement partner.
- As part of the safeguards against the threats to independence, audit rotation was put forward. This is where the audit moves to another firm although in the previous point, rotating to another engagement partner within the same firm will mean the same thing.
A B Ltd, a large quoted company, was founded and controlled by Mr. Narang. The principle business of the company was to develop undeveloped land in city centres into apartment blocks. In 2010, the Revenue Authorities became suspicious of the nature of the operations been carried out by the company and instigated an investigation.
The investigation highlighted weak organisational internal controls and non-existence in many cases. Payments to unknown persons and fictitious consultancy firms were found. In addition Mr Narang maintained a secret expense account that was used to disburse funds to himself. The board of directors did not know of the existence of the account which was maintained by the audit engagement partner. The auditors were heavily criticised in the report.
Winalot & Co the firm of auditors had an aggressive marketing campaign and had increased its audit fees substantially over a number of years. They had accepted the audit appointment in 2008 after the previous auditor had been dismissed. The audit report for 2007 had been heavily qualified on the ground of poor internal control and lack of audit evidence. Mr Narang had approached several firms of auditors in order to ascertain whether they would qualify the audit report given the present system of internal controls. Winalot said it was unlikely that they would qualify the report. They realised that Mr Narang was opinion shopping but were prepared to give an opinion in order to attract the client to their firm.
The PLC subsequently filed for insolvency and the auditors were sued for negligence by a creditor.
You are required to:
- Describe the procedures that an audit firm should carry out before accepting a new client with a potentially high audit risk.
- Detail the ethical problems raised by the maintenance of the secret expense by the audit partner.
- Suggest measures to try and minimise the practice of opinion shopping by prospective audit clients.
- Explain how audit firms can reduce the risk of litigation and its effects upon the audit practice.
Why would an auditor not seek re-election and what practical issues should an auditor consider when submitting a tender.
Discuss accountants and the advertising of fees.