Practice Management

Advanced Audit and Assurance / By

MODEL 4 – PRACTICE MANAGEMENT

1.1. BEFORE THE ENGAGEMENT SERVICES

Let’s now begin our journey with the things we have to do as auditors before writing an engagement letter or signing an engagement contract. There are five things to be considered:

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  1. ADVERTISEMENT:

There are particularly five (5) guidelines when we are deciding to advertise:

  1. Back up: This means that every evidence in our advertisement must be back up or have supporting information. For example; if in our advert we say “…we are a world class audit firm…” then we must prove what that means by saying the reasons why we are a world class audit firm. Such as “….. We have audited the financial statements of Coca Cola, Microsoft……” among others.
  2. Criticise: This guideline means that we must not advertise our firm at the expense of other firms and not respecting them. Like for example; we cannot say we are “PROFESSIONAL” in capital. When we use this word in capital, it means we are criticising other firms and calling them indirectly unprofessional.
  3. Definitely clear: Our advertisement must be clear. Saying we can charge our clients at a “competitive rate”, makes no meaning. It has to be clarifying as to what we mean by charging a competitive rate.
  4. Ensure to comply with law: We must ensure that our advertisement doesn’t contain any unlawful or illegal information. Example; we must be careful the statements we make concerning how we can help an organisation to reduce tax payable, however ensuring that the company is not invading tax.
  5. Fundamental ethics: This has to do with the issues in relation to professionalism.

 

  1. TENDERING:

After our advertisement, a client’s tendering board or committee will invite us and we will be drafting a tendering document as such, we must consider five aspects of the documents.

Resources :

In our tendering document, we must show or stake the resources we have which will enable us to carry out a quality audit work. For example; the offices we have, reputation, expertise, among others. 

Client’s needs:

Our tendering document must be direct to the client’s special needs or requirement. For example; when the client is preparing to be listed on a major stock exchange such as the Ghana Stock Exchange, then our audit must consider other issues like corporate governance apart from financial statement examination.

We must show the Way:

This means how we will be carrying out our audit. Such as audit sampling, identification of risks, among others.

Extra Benefits:

As prospective auditors we must stake the extra benefits that the client will be gaining when they engage us. Example; like when we identify a risk or inefficiencies in the internal control systems, we will make recommendations.

Fees: We must explain and show the fees calculation and explain the breakdown of the fees. This is very important to the audit firm since it will have to make profit on the engagement assignment at the same time, carry out a quality audit work.

 

  1. PROFESSIONAL APPOINTMENT:

 

  1. Factors:

These are the various factors that we have to consider in relation to the audit work to be undertaken. These include:

Build up knowledge:

The auditor must have knowledge of the client’s business. That’s the nature of the business, the nature of operations, the industry, and the risks likely to be associated with such businesses and have well informed understanding of the client. We can obtained the knowledge of the business from what we already know, what management tells us, what industrial analysts have published and also from third parties.

Expertise:

Depending of the nature of the business as our knowledge of the business, we must consider the experts we will be using in our audit. Example; legal, special valuation, information system experts, among others. This has the effect on how much we charge for the audit.

Control systems of the client company:

The strength and reliability of the control systems of the client will also have to be considered. If the control systems are strong and reliable, it pre-supposes that less work may be done. However, if the control system is weak and unreliable, it means the auditor must carry out a lot of audit procedures to reach a reasonable conclusion and that also affects the fees to be charged.

Opening balance of Financial statements:

This is basically where the client company is now having its accounts audited for the first time since operations. It means that the balances brought forward from previous years may contain errors or misstatements which need to be adjusted. This also affects how much fees charged.

Management style:

The style of management or management philosophy to the preparation and presentation of financial statements as well how things are done in the organisation must be taken into consideration since this has great effect on the kind of internal controls which will be in place and how effective these control systems are.

Existing Client Relationship:

This is from the auditor’s perspective. That’s if we are auditing a super market client and then we receive appointment from a firm like West Hills Mall, then we have to ask permission from the existing client if they agree that we take the audit. If the existing client disagrees, we then have to decide which of these firms in the same industry to audit. Why are we doing this? To avoid any conflict of interest, because there may be issues that is important to each of these firms.

Pressure on Fees:

As auditors, we have to consider any pressure by the client in relation to the fees. Example; if the client firm says unless we issue an unqualified audit report, we are not going to be paid. This may pose a lot of threats on us.

Reputation of Client Entity:

The reputation of the client company will also have effect on the audit firm when it audits the client. It means that when the client firm is having a bad reputation, the then that reputation will also have an effect on the audit firm; the reverse is true.

Advocacy Threats:

When the audit firm renders other services to the client entity, then it has to make sure that it is not perceived to be promoting the client’s business and remain independent.

Competent and Confidentiality:

The auditor firm must make sure that it has all the competent expertise to render or carry out the audit work and also be mindful of confidentiality.

Time and Deadline:

If we are require meeting a deadline by the client’s company, then we cannot lower our audit quality but allocate enough staff to audit the client entity. This is because we must keep the audit quality.

Integrity:

We must make sure that management is going to be honest and straight forward with us.

Staff and Resources:

The audit firm must ensure that the required staff and resources are available to render the audit services to the client.

Easy:

The complexity of the clients business and system will also have to be considered. This has to do with risk associated with the business.

NOTE: 

This is highly examinable area and you must be able to at least list five of the above and explain them thoroughly. 

To remember these, we can say “BECOME PRACTISE”. 

2. PROFESSIONAL CLEARANCE:

We have to make sure that we hear from the outgoing auditor and see to it that he was properly removed before we accept the audit. How do we do this?

  1. Seek client’s permission to contact the outgoing auditor (he knows what’s going on in the company).
  • If the company refuses to give us the permission or say no, then we must decline the appointment.
  • If the company grants us the permission to contact the outgoing auditor, we ask him “….. Are there any matter we should consider to become incoming auditors………?”
  • If the outgoing auditor answers “Yes” and tell us what we should consider, we as the incoming auditors will have to ask the client to explain away the issue raised by the outgoing auditor.
    • If the client cannot explain, we must decline the appointment
    • If the client explains the issue raised by the outgoing client to the best of our understanding, then we accept the appointment.

–     if the outgoing auditor answers “NO”, then we can go ahead and accept the appointment.

ETHICS :

This is where we consider the fundamental ethics issued by IFAC and adopted by ICA-GH. These include:

Independence:

The auditor must be seen as independent both in

  • Facts: This is the real state of mind of the auditor. Example; not have any direct or indirect financial interest in the client company.
  • Appearance: The auditor should not have any close familiar relationship with the client company.

Common threats to Independence are: 

  • Undue dependence on any single client or group of client
  • Overdue fees
  • Family and other personal relationships
  • Beneficial interest in shares and other investments
  • Acceptance of goods and services or hospitality

Further threats include:  

  • Self – interest: for example, having a financial interest in a client
  • Self- review: for example, auditing financial statements prepared by the audit firm
  • Advocacy threat: for example, promoting the shares in a listed entity when that entity is a financial statement audit client.
  • Intimidation threat: for example, threat of replacement due to disagreement.

Another threat to independence is the provision of other services to client

  • Specialist valuation
  • Second opinion

HOW CAN THE AUDITOR MITIGATE THESE THREAT TO INDEPENDENCE

There are safeguard that are put in place by the regulatory body, the audit firm and what the individual auditor (s) must follow and do in order to reduce or eliminate the threats to the independence of the auditor. 

  1. Integrity :  

The auditor must be honest and straight forward in everything.

iii.      Objectivity:  

This principle states that, members should not allow bias, conflicts of interest or undue influence of others to override professional or business.

iv.      Professional competence and due care:  

Member must have a continuing duty to maintain professional knowledge and skill at a level required to ensure that a client or employer receives competent professional service and act diligently in accordance with current developments in practice, legislation, techniques and professional standards.

Professional behaviour:

Members should comply with relevant laws and regulations and should avoid any action that discredits the profession.

Confidentiality:

A professional accountant should respect the confidentiality of information acquired during the course of performing professional services and should not disclose any such information without proper and specific authority from client or unless there is a legal or professional right or duty to disclose.

PROFESSIONAL DUTY OF CONFIDENTIALITY

The general rule is that information acquired in the course of professional work not be disclosed to third parties without first obtaining the client’s permission.

Subject to the above, there are two circumstances where disclosure without client’s permission can be possible.

These include:

  1. Obligatory :

This is where members are bound to disclose information. This is under the process of the law where they are served with court summons or called as a witness to a case involving the client.  ii. Voluntary:

These are circumstances where members are free to disclose information

  • In the public interest: There is no definition of “public interest”, therefore, legal advice should be taken in order to decide whether disclosure will be justified or not.
  • To protect a member’s interest
  • Authorised by statute: example; auditors are supposed to report any non- compliance with law or regulation to the proper authority.
  • To non- governmental bodies: This is where the NGO has a statutory power.

Quality Control:

Members must ensure that the audit work being carried out is of a high level of quality. That’s applying the ISAs during auditing. We can consider this from two stages:

  • Firm as a whole:

This means when the audit firm is recruiting auditors, it must ensure that they are qualified and of good quality to perform audit work.

  • Individual engagement letter:

We must endure as auditors that the client company is legal, has a good reputation or is not involved in any money laundering issues.

QUESTION: 

Explain the ethical implications of the following two practices in relation to fees.

  • Fixed fees
  • Lowballing

SOLUTION 

(a) Fixed fees: The ethical implications are:

  • the fee agreed may not be high enough and this may lead to insufficient work being performed.
  • this would increase the risk of an inappropriate audit opinion being given and would lead to an increased risk of a negligence claim.

(b) Lowballing: The ethical implications are:

  • the fee being set so low means that the audit firm needs to retain the client for a number of years in order to recover its initial losses.
  • therefore independence will be impaired as the audit firm will not wish to lose the client in the short term.
  • it could be seen as unprofessional because it means that smaller practices cannot compete.

REGULATORY ISSUES:

This refers to the various issues to be discussed as the regulatory body:

  • Per ICA- GH
  • Money Laundering:

This refers to the process whereby the proceeds of criminal activities are converted into asserts appearing to have a legitimate origin. It is the criminal attempt to conceal the illegal origin or ownership of property and assets of criminal activities.

Money laundering usually involves three (3) distinct phases: 

  • Placement of the funds into legitimate business activity
  • Transfer of money from business to conceal its original sources
  • Integration- the money takes on the appearance of having come from a legitimate source.

NOTE: The Bank of Ghana with the help of the Ghana’s Financial Intelligence Centre has enacted the Anti – Money Laundering Act, 2008 (Act 749), the Anti- Terrorism Act 2008 (Act 762) and the Anti-Money Laundering Regulations, (L.T 1987). 

 

 

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