Elements of assurance engagements  Three Parties Involved

The Practitioner: This is the individual or firm providing the assurance service. They are responsible for performing the engagement according to relevant standards and procedures.

The Responsible Party: This is the individual or organization responsible for the subject matter of the assurance engagement. For example, in a financial audit, the responsible party is usually the management of the organization being audited.

The Intended Users: These are the individuals or groups who rely on the assurance report to make informed decisions. They could be investors, regulators or other stakeholders.

 Subject Matter

The subject matter is the information or data that is being evaluated in the assurance engagement. It could be financial statements, compliance with regulations or the effectiveness of internal controls. The subject matter must be identifiable and measurable so that the practitioner can perform a proper evaluation.

 Suitable Criteria

Suitable criteria are the benchmarks or standards used to evaluate the subject matter. They provide a framework against which the subject matter is assessed. For example, in a financial audit, the criteria are generally the applicable accounting standards. The criteria must be suitable, relevant and agreed upon by the parties involved.

Evidence refers to the information and data collected by the practitioner to support their findings and conclusions. It is obtained through various methods, such as testing, observation, and inquiry. The quality and quantity of evidence are crucial in forming a reasonable basis for the assurance report.

 Assurance Report

This is the final output of the engagement, where the practitioner expresses their conclusion about the subject matter based on the evidence gathered. The report provides the assurance level, reasonable or limited that the information or processes being reviewed are free from material misstatement or in accordance with the criteria.

b)

i) Factors to consider before accepting appointment:

The new auditor should be aware of the attempted manipulation on the part of the management. If the new auditor feels that they will not be able to act within the IESBA Code of Ethics for Professional Accountants, they should not accept the appointment.

Integrity of Management  The fact that the company is changing auditors immediately after receiving a qualified audit opinion raises serious questions about the integrity and attitude of management toward fair financial reporting.

 Management’s stated reason — that they want auditors who are “more likely to accept” their accounting policies — suggests an attempt to find auditors who will be less rigorous or more compliant with their preferences.

Before accepting, the new auditors must assess whether management is honest, cooperative, and willing to provide all necessary information. If management lacks integrity, the reliability of accounting records and representations becomes doubtful, increasing the audit risk.

 This can be done through inquiries with the outgoing auditors (your firm), reviewing prior financial statements, and evaluating management’s response to audit recommendations.

Nature and Reason for the Disagreement / Implications for Audit Risk  The new auditors must carefully evaluate the nature of the disagreement that led to the qualified opinion — in this case, the adequacy of the provision for obsolete stock. They should determine:

 Whether management’s accounting treatment complies with the relevant accounting standards (e.g., IAS 2 Inventories).

Whether the disagreement reflects a fundamental difference in interpretation of accounting standards or management’s refusal to make necessary adjustments.

 If management’s view is not supportable under accounting standards, the new auditors could face a similar conflict, leading to an increased risk of material misstatement and potential damage to their reputation if they accept the engagement without due diligence.

 The auditors should also consider whether there are any other unresolved audit issues or potential misstatements in other areas of the financial statements.

ii) Ethical implications for New appointment: • The new auditor must be and be seen to be independent. In this particular case, care should be taken that the directors do not attempt to influence the audit opinion. • The new auditor must communicate with the outgoing auditors before accepting the appointment. Permission will need to be sought from JL Limited before

marking such communication, and if permission is refused, new auditors cannot accept the appointment. • The outgoing auditors may also need permission from JL Limited before they can share any matters that they feel should be brought to the attention of the new auditors before responding to any request for information. If permission is refused, the new auditors must carefully consider whether to accept the appointment. • The new auditors should also ensure that they can cope with the client’s size of the company, and it is the sort of clients that will ‘fit’ with their current portfolio. • The auditors should ensure that the guidelines on fee income are observed. JL Limited should not represent more than 15 % of the practice fee income. • Other ethical matters also need to be considered. For example, it should be ensured that there are no personal relationships between auditor and client that are restricted by the code. • The auditor should ensure that they are in compliance with or is aware of the following ethical principles/threats against independence: (i) Integrity (ii) Objectivity (iii) Intimidation