AUDITING TOPIC FOUR
the listing of the
ACCEPTANCE OF AUDIT ENGAGEMENT
The following are the steps a prospective auditor should take before
accepting nomination as the auditor:
i) Consider qualification for the appointment i.e. validly appointed
as an auditor in accordance with the Companies Act e.g.
¾ Have attained the minimal qualification as identified in the
first column of the Accounts Act, (1) he is not a body
corporate, (2) he is not an officer or servant of the
company, (3) not a person who is a partner or in the
employment of an officer or servant of the company, (4) he
is not disqualified to be an auditor in a parent, subsidiary
etc.
¾ Professional ethics do not block him from being an auditor,
i.e. in regard to independence.
ii) Meet with the management and know exactly what the
assignment involves to ascertain:
¾ The size, location and nature of his potential client and
evaluate his ability to serve him in terms of resources. In
this point, he will know the number of branches the
company has, number of subsidiaries, associates e.t.c.
secondly he will know about the location of these segments
and judge whether he will be in a position to serve the
client satisfactorily. For example if it is an oversea branch,
he has an associate there or he can be able to use the
correspondence to audit it.
¾ The number, qualification and experience of the
personnel to be used in such audit. For example if the
accounting system of his client is computerized, he has the
competent team to perform the work.
¾ To know the timing of the audit i.e. the year end of his
potential client and the time the report is required not to
delay the AGM.
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¾ The current commitment of the firm e.g.
firm in the stock exchange, mergers, acquisition etc to
enable the auditor to assess his liability.
iii) Request the client to give permission to communicate with the
retiring auditor to find out whether there are reasons
professional or otherwise as to why he should not accept the
appointment such as:
¾ Reason for his removal, to protect his interest as a matter of
professional courtesy.
¾ Integrity of the management and their management styles
e.g. centralized, decentralized, democratic etc.
¾ Areas of potential risk to put more emphasis while auditing
¾ Nature of the internal control systems to know whether
they can be relied upon.
Note that if such permission to communicate with the outgoing
auditor is denied he should decline the appointment.
iv) Depending on the assessment of the potential client, the auditor
can decide to accept or reject the appointment. Once the auditor
has accepted the appointment, he should communicate this to the
client through a letter of engagement.
ENGAGEMENT LETTER: ISA 210
The auditor should establish an understanding with the client regarding
the services to be performed, including the objectives of the
engagement, management’s responsibilities, the auditor’s
responsibilities and the limitations of the engagement.
The purpose of the ISA 210 is to establish standards and provide
guidance on:
1. Agreeing on the terms of the engagement with the client.
2. Auditor’s response to a request by the client to change the
terms of an engagement to one that provides a lower level of
assurance.
It is essential that both the client and the auditor should be of one mind
as to the work which the auditor is undertaking. It is therefore the
practice of professional firms to issue letters to their clients at the time
of being engaged to undertake the audit. When other services such as
tax, accounting or management advisory services are to be provided,
separate letters may be appropriate.
It is the interest of both the client and auditor that the auditor sends an
engagement letter, preferably before the commencement of the
engagement to help in avoiding misunderstanding with respect to
engagement. The engagement letter confirms the auditor’s acceptance
of the engagement, the objective and scope of the audit, the extent of
the auditor’s responsibility to the client and the form of any reports.
Principal contents of the engagement letter
1. The objective of the audit of financial statements i.e. to form
an opinion regarding the truth and fairness of the content and
method of presentation.
2. The management’s responsibility regarding the financial
statements i.e. it is their work to ensure accounting records and
financial statements which show a true and fair view and
comply with the act. Also the board’s responsibility to make
available to the auditors all the accounting records, other
relevant records and related information and the minutes of the
meetings. This includes unrestricted areas to whatever record,
documentation and other information requested in connection
with the audit.
3. The scope of the audit including reference to applicable
regulations or pronouncements of professional bodies to which
the auditor adheres to especially the ISAs and GAAS.
4. The form of any reports or any communication of reports of
the engagement, including sending of a letter of weakness to
those charged with governance.
5. The fact that because of the test nature and other inherent
limitations of an audit together with other inherent limitations
of internal controls there is unavoidable risk that even some
material misstatements may remain undiscovered.
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6. Arrangement regarding the planning and the performance of
the audit, i.e. the work will be planned and performed in
accordance to ISAs.
7. Expectation of receiving from management written
confirmation concerning the representations made in
connection with the audit i.e. in accordance with ISA 580.
8. Basis of which fees are computed and the billing
arrangements.
9. Arrangements concerning the involvement of other auditors
and experts in some aspects of the audit to come with audit
evidence.
RECURRING AUDITS
On recurring audits, the auditor should consider whether
circumstances require the terms of engagement to be revised and
whether they need to remind the client of the existing terms of
engagement. The auditor may decide not to send a new engagement
letter each period .However the following factors may make it
appropriate to send a new letter:
a. Any indication that the client misunderstands the objective and
the scope oaaaf the audit.
b. Any revised and special terms of engagement i.e. a change of
the engagement to one which provides a lower level of
assurance.
c. A change of senior management or those charged with
governance.
d. Significant change in ownership e.g. acquisition of subsidiary,
merger, associates etc.
e. A significant change in nature and size of the client’s business
e.g. opening of new branches and starting of other divisions.
f. Legal and regulatory requirement e.g. changes in auditing
standards together with objective or scope of the audit etc.
g. Change in the financial reporting framework adapted by the
management in preparing the financial statements, for example, a
change in accounting policies in accordance with IAS 8
“accounting policies, changes in accounting estimates and
errors”
PURPOSE/USE/OBJECTIVE OF A LETTER OF
ENGAGEMENT
¾ The auditor will define the extent and scope of his
responsibility, i.e. to form an opinion regarding the truth and
fairness of the content and method of presentation of financial
statements.
¾ Used to remind the directors or management of their
responsibility to prepare and present the financial statements.
¾ Minimize misunderstandings between the auditor and his client
as to what one has to do regarding the financial statements.
¾ Used to confirm in writing verbal assignment.
¾ Minimize the auditor’s liability to third parties in particular
under private audits where the auditor must define the scope of
his work.

N.B. Where the terms of engagement are changed the auditor and the
client should agree on the new terms. The auditor should not agree to a
change of engagement where there is no reasonable justification of
doing so.
If the auditor is unable to agree to a change of the engagement and is
not permitted to continue the original engagement, the auditors should
withdraw and consider whether there is any obligation either
contractual or otherwise to report to other parties such as a board of
directors ,shareholders etc the circumstance necessitating the
withdrawal.