The question requires you to describe to Mr. Charo the legal, ethical and practical factors your firm would consider before accepting the appointment. This implies that you must touch on the company‘s Act provisions and the guidelines issued by ICPAK.
a) Before your firm accepts appointment the following factors should be considered:
Ensure that your firm is professionally, legally and ethically qualified to act as an auditor. The auditor must ensure that he has not contravened any provisions of the companies Act in regard to independence. He must ensure that he is not a servant or in partnership with a servant of the company. In case the company has a holding company or subsidiaries it is also important to ensure that your firm has not previously been disqualified from being eligible for appointment as auditors of such subsidiaries or the holding company.
- Your firm must also ensure that it has fulfilled all the professional ethical requirements in regard to independence. I.e. the firm must not have any personal, family or business relationships with the prospective client among other provisions;
- Your firm should establish it has the technical proficiency to undertake the audit. This will include determining whether the firm posses the necessary technical skills to carry out the assignment;
- Establish whether the firm‘s resources are adequate to service the needs of the new client i.e. staff time with the necessary technical competence and experience;
- Your firm should seek references about the status of the company and its management. Such references will assist the auditor in assessing the potential risk in associating with this new client. Information sought would include the reputation of the company and its directors. It is a professional requirement that very firm must evaluate all prospective clients before accepting appointment. Seeking references about the client provides useful information in carrying out this evaluation;
- I would try to determine the reason for the change in auditor. The question says that the directors believe they do not receive a cost effective service from the existing auditor. However, there may be problems with the level of audit fee or the existing auditor may want to qualify his report which the directors are trying to prevent;
- I would obtain a copy of the previous years audited accounts. If the audit report is qualified, it indicates that the audit has a higher than normal risk. From these accounts I would assess whether the company is having going concern problems by calculating appropriate ratios such as the gearing ratio and if there could be weaknesses in the system of internal control;
- I would check that no conflict of interest arises through my acceptance of appointment as auditor of the company;
- I would consider the level of fee I would charge. It should be sufficient to provide an acceptable return, as an inadequate fee could result in insufficient audit work being carried out and thus increase the audit risk;
- Communicate to the outgoing auditor-Your firm should request the client‘s permission to communicate with the existing/outgoing auditor. If such permission is denied your firm should decline the appointment. If your firm receives permission from the client, you should write to the existing auditor requesting all the information which ought to be made available to you to enable you decide whether or not you are prepared to accept appointment. Communication with the existing auditor is not just a matter of professional courtesy. Its main purpose is to enable the prospective auditor ensure that there are no reasons which preclude him from accepting the appointment. It would be important at this stage to confirm with the outgoing auditor whether the true reason for being requested to resign is because their firm is perceived by management as not providing a value for money audit or could there be other reasons behind this.
Before replying to the prospective auditor the outgoing auditor should obtain the client‘s permission to discuss his affairs fully with the prospective auditor. If the outgoing auditor is duly authorized by the client to discuss the client‘s affairs with the prospective auditor, then he may communicate any relevant information he believes to be true, including the reasons for the proposed change and any other matter he considers that the prospective auditor should be made aware.
The prospective auditor must treat any information given by the outgoing auditor in the strictest confidence and should weigh this carefully in reaching a decision whether or not to accept the appointment.
If the client refuses the existing auditor authority to discuss his affairs with the prospective auditor, the outgoing auditor should inform the prospective auditor who should then decline the appointment.
If the outgoing auditor considers that there are professional reasons to prevent the prospective auditor accepting nomination he must disclose these to the prospective auditor. The prospective auditor should endeavor to ascertain the reasons for the change in auditors. If after doing this, he is of the opinion that the existing auditor is being treated unfairly, he may decline the appointment.
Therefore communicating with the outgoing auditor is important:
- To get necessary information that could guide him on whether to accept or reject nomination;
- To enquire on the reasons for the change in auditors;
- Professional courtesy.
Having considered these factors your firm should then make a decision on whether to accept the appointment.
After your firm accepts nomination it should carry out the following procedures
- Ensure that the removal or resignation of existing auditor is properly carried out in accordance with the Companies Act Chapter 486. I.e. a simple resolution was passed at the AGM removing the current auditors.
- That your appointment is valid and obtain a copy of new resolution passed in AGM to appoint you as the new auditor.
- Set up a letter of engagement to the directors of company.