# 5. AUDIT ENGAGEMENT

(INCORPORATING ISQC 1, ISA 210 and ISA 220)

# 5.1. Client Acceptance

ISQC 1 requires that prior to accepting an audit engagement, the firm should consider:

  • .The integrity of the principal owners, key management and those charged with governance.

  • .Whether the engagement team is competent to perform the audit engagement and has the necessary time and resources.

  • .Whether the firm and the engagement team can comply with the ethical requirements which include integrity, objectivity, competence, confidentiality and professional behaviour. There must be evidence that the engagement partner has formed a conclusion on compliance with independence requirements including:

    • .Identifying and evaluating circumstances that create threats to independence.
    • .Evaluating identified breaches.
    • .Taking action to eliminate threats or reduce them to an acceptable level by applying safeguards.

In addition to the above consideration, engagements may need to be declined where:

  • .An entity is operating in a specialised industry in which the auditor lacks the required expertise and expert assistance is not available.
  • .An entity operates a significant branch network where the firm is not presented, and there are no alternative audit procedures that can be adopted to cover these branch operations.
  • .The entity reporting deadlines coincide with existing client pressures.
  • . A quality control review is required and no suitably qualified and objective reviewer is available.

The information the firm obtains may come from:

  • .Communication with previous or existing providers of professional accountancy services to the entity and discussions with other third parties.
  • .Inquiry of other firm personnel or third parties such as bankers, legal counsel and industry peers.
  • .Background searches of relevant databases.

It is vital that the firm is not exposed to the risk of its reputation or future profitability by accepting new clients without proper vetting procedures. To adhere to the COE and in particular, the aspect of client confidentiality, the firm should inform the entity that it will seek information from certain persons as required by ISQC 1.

Where issues arise out of any of these considerations, the engagement team should undertake appropriate consultation in accordance with Section 4 of this Manual. The Client Acceptance Questionnaire is set out as Form 5.03 in Part E of the Manual. This should be completed at the acceptance stage. It should then be completed at least once every five years to ensure that there are no new circumstances that have developed that could affect the continuation of the engagement.

In addition to the ISQC requirements above, the firm should make sure that prior to accepting the appointment:

  • .It has confirmed that the provisions of the Companies Act relating to appointment of auditors have been complied with by inspecting the appropriate minutes or resolutions.

  • .Where there is a change of auditors, then in accordance with the COE:

    • .The entity has communicated with the outgoing auditor giving him the permission to communicate with the incoming auditor. Where necessary, the firm should inform the entity that it cannot accept an engagement until satisfactory communication has been received from the outgoing auditor.
    • .The firm writes to the outgoing auditor for professional clearance and requests appropriate information required to enable it to conclude whether to accept the engagement or not. Where no reply is received from the outgoing auditor, the firm should send a reminder within a reasonable period indicating that if they do not hear from the outgoing auditor within a certain time, they will accept the engagement on the assumption that there are no professional reasons as to why they should not accept the engagement.
    • .Once the reply is received (or even where one is not received after the reminder), the firm should consider whether it wishes to accept the engagement.
    • .Where the entity's permission for the existing auditor to communicate with the proposed auditor is not given, or where the existing auditor has given professional reasons as to why the proposed auditor should not accept the appointment, the proposed auditor needs to evaluate the circumstances and consider declining the appointment.
  • .The COE places an obligation on the existing auditor to inform the proposed auditor on whether there are any professional reasons as to why the proposed auditor should not accept the appointment. Such communication can only be undertaken after receiving the entity's permission to communicate with the proposed auditor. If such permission to communicate with the proposed auditor is not received by the existing auditor from the client, than that fact should be disclosed by the existing auditor to the proposed auditor.

# 5.2 Terms of Audit Engagement and Changes Thereto

ISA 210 requires that the auditor and the entity should agree on the terms of the engagement, preferably prior to the commencement of the engagement, in an audit engagement letter or other suitable form of contract.

The purpose of the engagement letter is to:

  • .Help avoid any potential misunderstandings in respect to the engagement.
  • .Document and confirm the auditor's acceptance of the engagement, the objective and scope of the audit, the extent of the auditor's responsibilities to the entity and the form of any reports.

The form and the contents of the audit engagement letter may vary for each engagement, but would generally include reference to:

  • .The objective of the audit of financial statements.
  • .Management's responsibility for the financial statements.
  • .The scope of the audit, including references to applicable legislation, regulations, or pronouncements of professional bodies to which the auditor adheres.
  • .The form of any reports or other communication of results of the engagement.
  • .Identification of relevant persons charged with governance with whom audit matters of governance interest will be addressed.
  • .The fact that because of the test nature and other inherent limitations of an audit, together with the inherent limitations of internal controls, there is an unavoidable risk that some material misstatements may remain undiscovered.
  • .Unrestricted access to whatever records, documents and other information requested in connection with the audit.
  • .Arrangements concerning the involvement of other auditors and experts in some aspects of the audit.
  • .Arrangements concerning the involvement of internal auditors and other entity staff.

A Specimen Audit Engagement Letter is set out in Appendix I** of this section.

On recurring audits, the firm does not need to send an engagement letter each year but should consider whether circumstances require the terms of the engagement to be revised and whether there is a need to remind the entity of the existing terms of the engagement. It may be necessary to send a new engagement letter where:

  • .There is an indication that the entity misunderstands the objective and scope of the audit.
  • .The terms of engagement have been revised or special terms added.
  • .There is a change of senior management or those charged with governance or where there is a significant change in ownership or in the nature and size of the business.
  • .There are specific legal or regulatory requirements.

Where the firm is requested to change the terms of engagement to one which would provide a lower level of assurance, it should consider the appropriateness of doing so including the legal, professional or contractual implications of the change. The firm should not agree to a change of engagement where there is no reasonable justification for doing so. Where the firm agrees to the new terms of engagement, it should confirm the new terms through a new engagement letter and issue a report based on the revised terms of engagement. Where the firm is unable to agree on the change in the scope and is not permitted to continue the original engagement, it should withdraw from the engagement and consider whether there is any obligation, either contractually or otherwise, to report to shareholders, those charged with governance and regulatory bodies on the circumstances necessitating the withdrawal. It would be appropriate to obtain legal counsel on such communication.

# 5.3. Continuation

The procedures for continuation of client relationship are similar to client acceptance. The risks referred to under client acceptance should be kept under continuous review, particularly in the early years of client relationship as the extent of knowledge a firm will have regarding the integrity of the entity will generally grow within the content of an ongoing relationship. The risks and rewards of continuation must be considered at the planning stage and at the completion stage. Where the terms of engagement have changed, the engagement partner should agree the new terms with the client through a new engagement letter. The engagement partner may or may not have initiated the client acceptance and continuation process regarding the engagement client. Regardless of this, it is the responsibility of the engagement partner to determine whether the most recent decision remains appropriate.

In deciding whether to continue a client relationship, the firm needs to consider significant matters that may have arisen during the year and their implication on the audit. These could include:

  • .Changes in the entity's business through expansion into areas where the firm does not possess the necessary knowledge or expertise.
  • .Additional information on the integrity of the principal owners, key management and those charged with governance, including changes in key management, governance and shareholding, which place a doubt on the integrity.
  • .Changes in circumstances which reduce the independence of the engagement team.
  • .Changes in legal, professional and regulatory requirements which the entity is unwilling to comply with.
  • .Outstanding fees or undue pressure to reduce fees or the scope of work.

An Engagement Continuation Questionnaire is set out as Form 5.03 in Part E of the Manual. This should be completed for each year, preferably after conclusion of the last audit, to ensure that significant matters in relation to continuation have been considered prior to the continuation. The Client Acceptance Questionnaire - Form 5.03 Part E of the Manual should however be completed at least once every five years to ensure that there are no new circumstances that have developed that could affect the continuation of the engagement.

The firm's consideration of client continuance and compliance to the ethical requirements, including independence, often occurs shortly after the completion of the previous audit and is re-assessed throughout the performance of the audit engagement as conditions and changes in circumstances occur.

# 5.4 Ceasing to Act

Where the firm ceases to act for an assurance client, it must carry out the procedures which ensure compliance with the ethical guidelines issued by ICPAK and any other legal requirements. Where the engagement partner identifies significant matters that cast a doubt on the continuation of the engagement or where the engagement partner obtains information that would have led to the firm declining the engagement if the information had been available earlier, the engagement partner should undertake appropriate consultations. All such consultations and the conclusions therefrom and how these were implemented should be documented. The engagement partner should then evaluate and take an appropriate decision on whether to:

  • .Resign from a current engagement due to new issues that have come to light that were not available at the engagement acceptance stage or where the entity wants to inappropriately reduce the scope of work or where there are material areas of disagreement with the entity.
  • .Not seek re-appointment due to significant matters that may have arisen during the year which may have an impact on future audits.

In addition to ceasing to act as the auditor due to resignation from an existing engagement or not seeking re-appointment, the firm could also cease to act by virtue of being removed from office by the shareholders. The firm:

  • .In cases where it ceases to act due to resignation from an existing engagement or not seeking re-appointment, should inform the management of this decision, and consider whether there is any obligation, either contractually or otherwise, to report to shareholders, those charged with governance and regulatory bodies on the circumstances necessitating the withdrawal from the engagement or resignation. It would be appropriate to obtain legal counsel on such communication.
  • .In cases where the firm is removed from office by the shareholders, it should consider whether the firm should attend the annual general meeting where it is to be removed and report on circumstances that led to the firm's removal. This may be necessary where the firm is removed from office due to not complying with unreasonable demands of the management, those charged with governance or the shareholders. It would be appropriate in such cases to obtain legal counsel.

In all these instances, the firm is likely to be contacted by the new auditor, who may require professional clearance or release of information or documentation. In all cases, the firm should adopt a professional approach in providing the relevant information. All such information or documentation should only be released to the new auditor after obtaining the relevant written authority from the entity to provide the new auditor with the information and documentation. Where such authority is denied or limited by the entity, the fact should be disclosed to the incoming auditor. Where the firm has professional or other reasons as to why the incoming auditor should not accept the appointment, it should inform the incoming auditor of this. It may be prudent to discuss the reasons with the entity, and where appropriate, seek legal counsel.

In providing information and documentation to the new auditor, the firm should consider:

  • .Whether the information and documentation belongs to the firm or the entity.
  • .Whether the firm has a lien on the entity's documentation due to outstanding fees.
  • .The risk to the firm in releasing documentation that belongs to the firm.

However, the fact that fees are owing to the existing auditor is not a professional reason for not providing professional clearance.

# 5.5. Non-Audit Engagements

The firm could provide other services to the entity provided that this does not compromise the firm's independence. The COE provides a safeguard through the use of different partners or teams with separate reporting lines for the provision of non-audit services to assurance clients. However, even when this is used, the firm should consider that relying heavily on a entity for its fee income or letting persons not engaged in the audit work to influence the audit could influence the independence requirements. Where other services are provided it is recommended that separate engagement letters should be issued for each of the services including tax, accounting and management advisory services.

The COE requires that where the firm is requested by an entity to undertake additional work which is clearly distinct from the one being carried out by the existing auditor, the firm should inform the entity of the professional obligation to communicate with the existing accountant and should immediately do so advising, in writing, of the approach made by the entity and the general nature of the request as well as seeking all relevant information, if any, necessary to perform the assignment.

Where the entity insists that the existing auditor should not be informed, the accountant should decide whether the entity's reasons are valid enough not to communicate with the existing auditor.

APPENDIX I: SPECIMEN AUDIT ENGAGEMENT LETTER

Date

The Directors

.…………………………. Ltd.

P.O. Box ………, ……….,

………………….., ………………..

Dear Sirs,

# RE: SPECIMEN AUDIT ENGAGEMENT LETTER

Following our appointment as auditors of the company, we set out here below the basis on which we are to act as the auditors of .…………………………… Ltd. and the respective areas of responsibility of the directors and of ourselves.

Respective responsibilities of directors and auditors

  1. As directors of the company, you are responsible for maintaining accounting records, for the selection and application of appropriate accounting policies and for preparing financial statements in conformity with International Financial Reporting Standards and the requirements of the Companies Act (Cap 486), which give a true and fair view of the state of the financial affairs of the company. You are also responsible for making available to us, as and when required, all the company's accounting and other records and information including minutes of all management, directors' and shareholders' meetings and information and explanations which we consider necessary for the performance of our duties as auditors. We are also entitled to attend all general meetings of the company and to receive notices of all such meetings.

  2. We have a statutory responsibility to report to the members of the company whether in our opinion the financial statements give a true and fair view and have been prepared in accordance with the Companies Act (Cap. 486). In arriving at our opinion, we shall consider the following matters and report on:

  3. a)Whether proper books of account have been kept by the company;

  4. b)Whether the balance sheet, profit and loss account and the cash flow statement are in agreement with the books of account;

  5. c)Whether we have obtained all the information and explanations, which to the best of our knowledge and belief were necessary for the purposes of our audit.

  6. We also have a professional responsibility to report if the financial statements have been prepared in conformity with International Financial Reporting Standards. We have to report on all areas of non-compliance and give our opinion as to whether we concur or not with any departures. In determining whether or not the departure is justified, we shall consider:

  7. a)Whether the departure is required in order for the financial statements to give a true and fair view; and

  8. b)Whether adequate disclosure has been made concerning the departure.

  9. Our professional responsibility also extends to considering whether other information in documents containing the audited financial statements is consistent with those financial statements.

  10. Assistance with the preparation of financial statements does not form part of the audit. We shall however, during the course of our audit, discuss the company's accounting policies with the directors and management particularly in any problem areas and we may propose adjusting entries for your consideration. The directors will be responsible for reviewing and passing of all such proposed adjustments.

  11. The audit will be coordinated by one of our partners. In providing audit services, we will obtain both formal and informal consultations involving other partners and staff in order that the advice we give represents the breath of knowledge and collective experience of our firm. We may also seek independent professional advice or involve a specialist as part of our engagement team.

  12. We require strict adherence of all our partners, staff and specialists on our team to the ethical rules of our profession. Therefore, in all respects of our practice, we maintain strict confidentiality towards information obtained while carrying out our professional duties. In addition, the firm's partners, staff and specialists maintain complete independence and mental attitude in relationships with clients.

  13. Where the firm and \ or its associates offer other services to the company, we shall not be treated as having note, for the purposes of our audit, of information provided to the firm, its associates and members of staff other than those engaged on the audit.

  14. The company may identify in writing those directors and staff who are authorised to act on behalf of your company on audit issues. In absence of any such identification by the company, we will assume that any of the directors or key management staff are so authorised.

  15. The company may identify in writing those persons charged with governance with whom audit matters of governance will be communicated. In absence of any such identification, we will determine the appropriate level of communication based on the nature of the issue to be communicated.

  16. It is fundamental to our engagement that the company provides us in good time all information and supporting documentation that is relevant to the audit, and that all matters of uncertainty are brought to our attention.

Scope of audit

  1. Our audit will be conducted in accordance with International Standards on Auditing and will include such tests of controls, transactions and of the existence, ownership and valuation of assets and liabilities, as we consider necessary. We shall obtain an understanding of the accounting and internal financial control systems to the extent necessary in order to consider their suitability as a basis for the preparation of the financial statements and to establish whether adequate accounting records have been maintained by the company.

We shall expect to obtain such appropriate evidence as we consider sufficient to enable us to draw reasonable conclusions there from. The nature and extent of our procedures will vary according to our assessment of the control environment, the company's system of internal controls and of the accounting system.

Our work may be varied on the basis of our findings during the course of an audit and from year to year. Accordingly, we may modify our audit scope, rotate our audit emphasis and propose matters of special audit emphasis, as the circumstances dictate.

As our responsibility is to report on the financial statements as a whole rather than those of the individual units or divisions, the nature and extent of our tests and enquiries at each unit or division will vary according to our assessment of the accounting system and internal financial controls. Thus, we may carry out limited work at certain units or divisions, rather than the full audit that would be necessary if we were to report on the separate accounts of the unit or division concerned.

Our audit includes assessing the significant estimates and judgments made by the directors in the preparation of the financial statements and whether the accounting policies are appropriate to the company's circumstances, consistently applied and adequately disclosed.

In forming our opinion, we will also evaluate the overall presentation of information in the financial statements.

Management representations

  1. As part of our normal audit procedures, we shall request appropriate directors or management to confirm to us in writing each year matters material to the financial statements when other sufficient appropriate audit evidence cannot be reasonably expected to exist. We may also ask them to confirm in that letter that all important and relevant information has been brought to our attention.

Detection of fraud, error and non-compliance with laws and regulations

  1. The directors are responsible for safeguarding the assets of the company, the maintenance of adequate internal financial and operating controls, and the prevention and detection of fraud, error and non-compliance with law or regulations. We shall maintain an attitude of professional scepticism recognising that material misstatements and fraud could exist notwithstanding our past experience. However, because of the test nature and other inherent limitations of an audit, together with the inherent limitations of any accounting and internal control systems, there is an unavoidable risk that some material misstatements and frauds may remain undiscovered.

Reports to management

  1. An audit is not designed to identify all significant weaknesses in the company's system of internal financial controls. However, where we consider it appropriate, we shall report to the management following our audit those significant weaknesses in the financial internal control systems or other business matters which come to our notice during the course of our normal audit work and which, in our view, require management's attention.

Our review of internal financial control systems is only performed to the extent required to express an opinion on the company's financial statements and therefore our comments on these systems should not necessarily be regarded as a comprehensive list of all possible improvements to financial internal controls or to operational procedures, which a more extensive review might reveal. Moreover, such reports form part of a continuing dialogue between us therefore it is not intended to include every matter that comes to our attention.

The report is in addition to, over and above our legal responsibilities as auditors and will be prepared for use exclusively within your organisation. The report may not be provided to any third party without our prior written consent. Such consent will be granted only on the basis that such reports are not prepared with the interests of anyone other than the company in mind and that we accept no duty or responsibility to any other party.

Information published with financial statements

  1. In order to assist us with the examination of other information to be published with the financial statements, we require early sight of all documents or statements including the directors' report, chairman's statement and operating, financial and other information which is to be published with the financial statements. We will need to satisfy ourselves that the information is consistent with the audited financial statements.

If the company intends to publish or reproduce in printed form or electronically our report together with the financial statements or otherwise make reference to our firm in a document that contains other information, the company hereby agrees to:

  1. a)Provide us with copies of all such information to be published with the financial statements; and
  2. b)Obtain our approval in writing for inclusion of our report before the document is finalised and distributed. Where our audit report is reproduced in any medium, the complete financial statements including notes must also be presented or a note to the effect that the information is only an extract consistent with the financial statements and that the complete set of the financial statements is available for inspection.

Responsibility of auditors after issue of the audit report

  1. Once we have issued our report, we have no further direct responsibility in relation to the financial statements for that financial year. However, we expect that the directors will inform us of any material event thereafter, which have an effect on the financial statements.

Reliance in the audit by third parties

  1. Our audit opinion is addressed to the shareholders of the company in their capacity as shareholders. The audit will not be planned or conducted in contemplation of reliance by any third party or with respect to any specific transaction. Therefore, items of possible interest to a third party will not be specifically addressed and matters may exist that would be assessed differently by a third party, possibly in connection with a specific transaction.

Working papers and ownership rights

  1. The working papers and files for this engagement created by us including electronic documents and files are the sole property of the firm. Where we provide the company documentation or information during the course of our work, the ownership rights will be adhered to by the company.

  2. Where we are required by legislation, or by the by-laws or professional guidelines issued by professional bodies that our partners and directors are members of and by our international affiliates to give access to our audit working papers to certain third parties for quality control reviews, we will avail the working papers to such parties without seeking the company's consent.

Internet communication

  1. During the engagement, we may from time to time communicate with the company electronically. However, the electronic transmission of information cannot be guaranteed to be secure, error free or virus free and such information could be intercepted corrupted, lost, destroyed, arrive late or incomplete or otherwise be adversely affected or unsafe for use. We shall not have any liability of whatsoever nature to the company arising from or in connection with electronic transfer of communication and information to the company.

Fees

  1. Our fees are based on the time spent on the engagement, the degree of responsibility involved and the category of staff involved and charged exclusive of Value Added Tax and disbursements.

  2. The fees will be subject to an annual review and will vary with a number of factors, including developments in the business. It is our practice to provide estimates of our fees in advance of the work commencing. We shall require progress payments as our work progresses. Audit fees are payable on rendering of our fee note.

We reserve the right to charge compounded service charge monthly effective from the month following the one in which the fee note is submitted. The rate of service charge will be 2% per month.

  1. We shall have lien over the company's records for any unpaid fees and shall pass on to the company any costs and expenses incurred in the recovery of overdue fees and service charge.

Indemnity

  1. The company will indemnify us and keep us fully and effectively indemnified at all times against any action against us or any costs or expenses incurred or any loss suffered by us as a result of acting for the company in good faith based on the information supplied by the company to us.

Terms of engagement

  1. This letter supersedes any existing previous, express or inferred terms of engagement that the company had with us and shall remain effective until it is replaced or terminated. The engagement may be terminated by either party. Any termination of our appointment by the company will require a formal resolution at a validly convened shareholders meeting or resolution signed by all the shareholders.

  2. If any of the terms of this engagement letter shall be found by any court or administrative body of competent jurisdiction to be invalid or unenforceable, the invalidity or enforceability of such provision shall not affect the other provisions of this letter of engagement and all provisions not affected by such invalidity or unenforceability shall remain in full force and effect. The parties hereby agree to attempt to substitute for any invalid or unenforceable provision as valid or enforceable provision, which achieves to the greatest extent possible the objectives of the invalid or unenforceable provision.

Applicable law

  1. This engagement letter shall be governed by, and construed in accordance with the Laws of Kenya.

Arbitration

  1. The parties hereto will make every reasonable effort to settle amicably between themselves any disputes or differences arising out of this engagement. In the event of their being unable to settle such disputes or differences, they will refer this to arbitration of a person to be agreed between the parties hereto. Failing such agreement within 14 days of the application by either party, the chairman of the Chartered Institute of Arbitrators of United Kingdom, Kenya Branch, shall appoint an arbitrator. The decision of the arbitrator will be final and binding on both parties.

Acknowledgement, acceptance and termination

  1. The engagement will be confirmed upon signing the letter in the space provided and initialling all the pages of the letter and returning it to us.
Last Modified: 7/9/2019, 10:45:48 AM