Session 7

[Vivienne]

Question

a)Explain the fundamental priciples that are set out in the ACCA Codes of ethics
(5marks)


b)Your auditing practice is a firm of 3 partners and 10 staff.Your firm has been offered the appointment as auditor of a new client company Mwamba ltd which is a large manufacturer of agricultural machinery. Mwamba ltd has 5 manufacturing centres and has computerised accounting systems.

Required:
i)Describe the matters to consider within your firm and the procedures that must be undertaken before accepting appointment as auditor to Mwamba (10marks)

ii) Explain the purpose of an engagement letter and list its contents (5marks)

[Acid]

a) The fundamental principles of ACCA Code of Ethics are :

- Independence : Auditors should be able to provide an independent opinion which shouldnt have influence of anyone else thought , pressure which is likely to distory the truth and fairness of the story.

- Objectivity : Auditor should impart an professional and true opinion , and shouldnt bring anything personal or highly subjective while providing the audit opinion.

-Confidentiality : Auditors shouldnt disclose the confidential information except where they have the right to do so.

- Integrity: Auditors shold be straightforward and honest in all their dealings
Professional competence and due care : There work should be that of a competent person and they should provide an ongoing commitment towards latest development which is necessary to carry out a better audit.

b) The matters to be considered inlcudes the followings:

Do we have enough staff available to carry out the audit effectively? If not , what are the alternative ways to carry the practice.

Is the staff competent? Would the be able to carry out effective audit for the client?

Do we have previous experience of nature and operation of an agricultural industry ? As nowdays Audits are more geared towards service industries , would we need an understanding of the nature of industry the client opeartes in ?

Would a staff consisting 10 members be enoughto carry the audit for a large manufacturing client with 5 centers ?

Do we have sufficient knowledge of the computerised accounting systems in place to know about the internal control systems?

ii) Engagement letter is made before the audit takes place: The content of a typica engagement letter includes:

- The type of audit i.e. reasonable assurance or limited
- Nature , timing and type of audit procedures
- The Scope of the audit
- The deadlines
- The audit staff to be involved

[Vivienne]

yes Acid

i have gone through your answer though am not a mentor .i have noticed that you have left out certain parts of the question. you have not talked about the purpose of the engagement letter but have talked about its contents.secondly you have written the considerations to follow before accepting appointment but have left out the procedures. and lastly why are your answers always in point form ,someone else pointed out that in your answers to the previous sessions.do you think the examiners accept point form or we have to add some flesh to the skeleton?

[Acid]

you raised few valid points , I hope we will get back something regarding this from mentor. I will read through the omissions and include them seperately

Thanks for pointing this out.

Here ... 2 Roses for you!

Acid

[Annie]

Hi,

a) Fundamental principles of ACCA code of ethics -

Integrity: Here the ACCA member should be honest and straightforward in his professional relationships. They should be associated with any fraud or misleading financial statements.

Objectivity: A ACCA member should know his objects clearly. He should not mix his personal goals with his professional objective. Therefore his opinion should always be unbiased and based on sound rationale and research.

Professional Competence and Due care: The member should ensure that he has the professional knowledge and expertise to deal with a particular issue or matter and then only take up any assignment. While he is on the job he should apply all his expertise and skill and work hard on it. He should ensure that his staff is also capable of handling the task. He should give them adequate training.

Confidentiality: The clients informations should be kept very confidential and should not be passed to any third party.

Professional behaviour: The member should comply with all the applicable and relevant laws and regulations . He should not do any such act which will bring disgrace to his profession. They must behave with courtesy and consideration with those whome the come in contact for professional reasons.

They should not indulge into false advertising to promote their services.

b) Before accepting the assignment I should consider whether I will be able to work and complete teh assignment without compromision on the fundamental ethical principles . If I feel that at any point in the course of the audit these principles would be overruled then I should turn down the offer.

I would first see that is there anything that hampers my Integrity. I would follow the rule of thume where I would see that I do not receive maximum trunover from the client. The percentage is 5% for listed or public organisation and 10% for privately held organisation, so that I depend so much on the revenue that I would not be honest in expressing my opinion and would express whatever the client wants in the fear of loosing a good revenue.

I would see that my independence in performing the assignment is not at stake. There should not be any conflicting interests.

I should be confident that I have the expertise and skill to perform

He should see that the client has a good attitude towards paying taxes and complying with the laws of the land.

ii) A engagement letter is important as the auditors cannot advertise their services, so they cannot lay down their expertises available anywhere. When a client approaches the auditor he lays down the areas where he needs the auditors services and their nature. The auditor can go through them and then decide whether he has the expertise to perform them . He can also judge whether his integrity and objectivity would be challenged. Whether he can act professionally. Therefore a engagement letter is very important for the auditor to decide whether he should take the assignmnet or not.

The engagement letter contains teh topics that would be covered and agreed upon for the audit assignment .

The accountant after going through them would then proceed to obtain permission of the client to contact the previous auditor. If he refuses then the auditor should not take the assignemnet. If he permists then the auditor should write to the previus auditor and try to get some more additional information of teh assignement. If the report given by the previous auditor is favourable he should accept the assignemnt and viceversa. If no reply is received then he should use his judgement .

I think I have covered everything.

Annie

[Vivienne]

Hi annie,

as i have noticed even with acid this must have been perceived to be an easy question and as a result most of the details may have been missed.
i noticed that you didnt state the procedures that you would follow after accepting appointment.you also stated that an audit client should not have more that 5% of his total income from one client.i thought it was supposed to be 15% did you just miss the 1 or what. anyway lets move on expecting our mentors to give us the feedback.dont also forget that you are putting up the f8 session tommorow

[Vivienne]

The fundamental elements of the ACCA Code of ethics are:

i)intergrity
intergrity means to be honest and truthfull in all your dealings such as professional business and financial relationships.intergrity is essential to everyone dealing in public interest

ii)objectivity
objectivity means dealing with the situations that one is faced with without bias and compromise.

iii)competence and due care
members should not accept to peform or undertake work the they are not competent to do

iv)independence
members should not participate in work that will impair their judgement because of relationships


b)Before an auditor accepts appointment of auditing a new client , there are matters that have to be considered
i)does our firm have sufficient manpower and resources to carry out the work effectively.we are told that Mwamba ltd has 5 manufacturing centres and these have to be covered by the 10staff that we have.10 staff may be sufficient or not depending on how busy the manufacturing centres are.

ii)does our firm have the necessary competences or skills to complete the audit.mwamba ltd is an agricultural manufacturing company and uses accounting systems.accounting systems will bring in the use of CAATS. we must ensure that our staff can work confortably with these.

iii)is our firm independent of mwamba ltd.non our staff should have any financial interest in mwamba ltd or any close relatives however there are ways of mitigating this

iv)are there no conflict of interst between mwamba ltd and ourselves .

PROCEDURES

i)seek the permission of the directors to speak to the outgoing auditors.this is in order to see if their resignation was done in accordance with the laid down procedures or if ther are any matters that they may wish to bring to your attention.if the directors refuse the permission then the appointment should be declined.

ii) a sound knowledge of the entity is required.ISA 315 Understanding the entity and its enviroment states that we should obtain the knowledge of the business which is sufficient for us to identify those areas which are of high risk and may require detailed tests.

iii)analyse the competences of our auditors and asses whether they will be need to rely on a specialist or profesional expert on agricultural machinery.


2 An engagement letter is a letter of acceptance sent by the auditor to his client at the begining of any new audit.
its purpose is

i)to confirm the auditors acceptance which constitutes a contract between auditor and client

its contents are
i)how the audtit fee has been arrived at in other words the basis
ii)it states the responsibilities of the directors in respect of accounting records and financial statements
iii)if the auditors are going to use specialists this is stated here.
iv)the expected deadline of the audit
v)the procedures that are going to be followed for any complaints that may arise.
vi )it also states that the auditors may use the work of internal auditors.

the end i stand to be corrected

[sash_lar]

a) There are five fundamental principles which are set out in the ACCA Codes of ethics:
1. Integrity
2. Objectivity (Independence)
3. Competence and due care
4. Professional conduct
5. Confidentiality

Integrity implies honesty and fairness. It is an important ingredient, as it will influence/determined the value that is placed on an assurance service.

Objectivity (independence): an assurance service should be done without fair or favor. That is there should be no ties or connectivity to the client that may influence the decision of the audit. An auditor must not only be objective in the sense of the word but must also appear to be objective. Great reliance is placed on an assurance service therefore it is important that there be no doubt by the stakeholders that the information produced is reflecting a true picture of the position of the company.

Compliance and due care: an auditor should have the requisite knowledge to conduct an assignment. There should be some level of skill, diligence, and care employed when an audit is being conducted.
Diligence and care would suggest that an evaluation of the scope and procedure is carried out.
Skill and knowledge, the auditor should be equipped with the necessary information to perform his duty which can be attained through various professional courses such as ACCA.

Confidentiality: information acquired during an assignment should not be disclosed to any third party unless permission was given by the client or legal obligations.
A level of trust is required in order to gain information needed to conduct an assignment.

Professional conduct: there should be a level of courtesy and consideration to all persons during the course of work.


b)
i) Things to consider before accepting an engagement
1) Obtain a reasonable understanding of the business that is, the complexity of the organization, the controls in place, and the integrity of the company.
2) Determine the nature, scope and the time required to complete the audit. This will give an idea as to the level of resource required.
3) Determine whether the firm is equipped with the requisite staff. That is, does the audit require any expert in the field of agriculture or computer?
4) Determine whether the firm have sufficient staff to handle the assignment.
5) Determine whether there is any conflict of interest that is, ownership in the client’s business by any of the partners or staff, close relationship.

Procedures to follow before accepting the assignment
1) ascertain the reason for the change in auditor from the client
2) Seek permission from client to contact the previous auditor
3) With permission from the client, write to the previous auditor requesting reason for leave.
4) On receipt of reply assess any issues arise and the impact if assignment is accepted.
5) If no response is received, try other means of contacting the previous auditor.
6) If no response is still not received then other means of soliciting information re: threats or potential risk should be sourced.

NB. I did not think any other info. was needed with this question, am I right or more elaboration of each step should be done.


c) Purpose of an engagement letter
An engagement letter usually spells out the requirement of each party. It seeks to avoid or clear up any misunderstanding between the auditor and the client. The expectation of the auditor and the client are usually explicitly stated.
The engagement letter entails:
1) The acceptance of the appointment by the auditor
2) The objective and scope of the audit
3) The responsibility of the auditor and management
4) How the result of the audit will be reported and the persons to which it will be communicated to.

NB. I did not think any other info. was needed with this question, am I right or more elaboration of each step should be done.

[tracy]

The 5 fundametal principles set out in the ACA code of ethics are:
Integrity - Members are to be straight forward and honest in all professional and business relationshipes. They must not be involved in any fraudulent or inaccurate financial statements.

Objectivity - Accountants findings and judgments should be based solely updon sound, rationale and research, they are expected to keep any bias or conflict of interest out of their work.

Professional competence and due care - Accountants must ensure that he has the neccessary professional knowledge and skill set so as to be able to meet the service requirements of his client. They must work hard and diligently whilst providing his services. They must ensure all his subordimate and staff have the necessary training and supervision to competently perform the task assigned to them.

Confidentiality - Accountants should never disclose any confidential information of their clients.

Professional behaviour - The IFAC requires members "should comply with relevant laws and regulations and should avoid any action that discredits the4 profession" the ACCA also adds that members should "behave with courtesy and consideration towards all with whom they come into contact in a professional capacity". Members should not engage in false advertising and should not slander the work of other accountants.

Bi) Matters to consider and the procedure that must be undertaken before accepting appointment as auditor to Mwamba.
If the firm can act ethically and in the best interst of the client and the profession, They must look at whether they can always be objective and independent of their work and be resaonalby certain that there are no personal biaes on conflicts of interest.
They must be confident that they have the neccessary knowledge in the client i.e manufacturer of agricultural machinery as well as sufficient time to complete the audit.
also the professional behaviour principle requires the firm to always be on the right side of the law and obey all relevant rules so they must be able to keep to this before accepting the audit work.
At this point negotiations would begin to discuss:
the objective of the audit
IF the auditors would have full access to all information.
The extent at which the auditor would be responsible for uncovering fraud and for evaluating the internal control systems.
The remuneration that would be paid to the auditor.

ii) The content of an audit engagement letter si all the topics that have been agreed updon by the auditor's an dthe organisation. It represnts official documentation of all terms and conditions of the audit and is signed by both parties. They outline the responsibilites and expectations of both parties and help to avoid any misunderstanding taking place during the audit.
The enagement letter is sent to the board of directors for approval.

[Pixiefeet]

Am I right to say that the engagement letter is completed AFTER the audit has been accepted by the Auditors. Also in this scenario would a list format be prefered detailing that contents of the engagement letter and explaination of each!!

[haha]

Hi Pixie

Engagement letter is a binding contract between the auditor and the manangement of the company (prior to auditing). It lists out responsibility of the auditor and what work is to be carried out and also list out responsibility of the management i.e. to produce FS.

The content of the engagement letter is less likely to be examined therefore you can quickly have look to vaguely have an idea of what it's like but might not needed.

Let me know if i were wrong.

Haha