(a)  The firm needs to consider a variety of commercial issues and ethical matters (under IESBA’s International Code of Ethics for Professional Accountants).

Internal matters

Before accepting appointment the firm should ensure that:

(i) it has the necessary staff with appropriate competencies to complete the audit (this seems likely given that the firm has other clients in this sector);

(ii) the staff are available at what is a busy time of year for the firm (it may be possible that all of the staff with the necessary competencies are otherwise occupied);

(iii) the firm is independent of Nexcare. It is unlikely that there will be any issues concerning shareholdings in the client (because it is owned by two entrepreneurs), however, there may be staff or partners who are related to the client or are otherwise connected with it;

(iv) there are no conflicts of interest that cannot be properly managed. Conflicts of interest may exist because the firm has other clients in this sector.

Other procedures

The firm should:

(v) seek the directors’ permission to communicate with the company accountant about the nature of the disagreement and the directors should authorise the accountant to co-operate with the firm;

(vi) seek the clients’ permission to communicate with the incumbent auditors, if permission is refused, the appointment shall be carefully considered;

(vii) communicate with the incumbent auditors (preferably in writing) requesting all the information which ought to be made available to enable the firm to decide whether or not to accept the appointment (if there are no such matters, the incumbent auditors should inform the firm of this);

(viii) seek appropriate transfer information (such as a copy of the last set of accounts and a detailed trial balance reconciled to the accounts);

(ix) indicate a likely fee (or the basis on which fees are calculated) to Nexcare, ensure that this is acceptable and that the client is able to pay (by some form of credit check);

(x) ensure that the incumbent auditor has properly resigned, been dismissed or has not sought re-appointment in accordance with legal requirements; and

(xi) ensure the appointment is valid in law and has been properly documented.

 

(b) It is inappropriate to start the audit before the procedures referred to above have been completed because:

(i) without the staff with appropriate competencies the firm will be in breach of the Code (and may be found negligent if things were to go wrong);

(ii) without complying with the requirements relating to independence and conflicts of interest, the firm will not only be in breach of the Code, but will lack objectivity and may find that the client (or other party) objects to the appointment to another client in the same sector;

(iii) without performing appropriate procedures the firm will be unable to form an opinion on the integrity of the client – it may find itself associated with an entity engaging in doubtful or even illegal activities (taking account of the disagreement over disclosures);

(iv) without agreeing a fee it is almost inevitable that misunderstandings or disagreements will arise;

(v) without communicating with the accountant and the incumbent auditor, it is quite possible that disagreements over disclosures will arise, similar to those that have arisen in the past;

(vi) without ensuring that the incumbent auditor is no longer in place, it will be inappropriate for the firm to seek appointment.

 

(c)Objectives in agreeing terms of an audit engagement

The objective in agreeing the terms of an audit engagement per ISA 210 is to accept or continue an audit engagement only when the basis upon which the audit is to be performed has been agreed. This is done by:

(i) establishing whether the preconditions for an audit are present; and

(ii) confirming that there is a common understanding between the auditor and management.

Main contents of an engagement letter

The engagement letter shall include reference to the following.

(i) The objective and scope of the audit.

(ii) The responsibilities of management.

(iii) The responsibilities of the auditor.

(iv) Identification of the underlying financial reporting framework.

(v) Reference to the expected form and content of any reports to be issued.