Situations where auditor confidentiality is permitted to be breached
Disclosure is permitted by law and is authorised by the client
Disclosure is required by law eg fraud, theft, tax law, money laundering, insider dealing, health and safety law, employment law & environmental offences
There is a professional duty or right to disclose eg to comply with a quality review by a professional body, to respond to an inquiry by a regulatory body
A conflict of interest arises when the same audit firm is used for 2 companies that interact with each other eg Companies operate in the same market, Companies trade with each other
You are the audit manager responsible for the audit of Broome Co, a listed company. You have been informed by one of the audit juniors that the finance director has offered to take the audit team to a World Cup Final at the expense of the client as a thank you for an efficient audit. The finance director has requested that you attend a social event where the company will outline a new rights issue of ordinary shares to shareholders. The finance director believes that the presence of the external auditor will add credibility to the rights issue and increase the chance of raising the required finance.
The prospective firm should ask the client for permission to contact the outgoing auditor, the outgoing auditor should also ask the client for permission to speak to the new auditor, if the client refuses permission the outgoing auditor should notify the prospective auditor of this, if no reply is received from the outgoing auditor should try other means to get a reply, ask for all information relevant to deciding whether or not to accept the appointment, make a decision
Check if the financial reporting framework to be applied to accounts preparation is appropriate, ensure management understand and accept their responsibilities to prepare the financial statements using the applicable financial reporting framework and ensure internal controls are in place to produce accounts which are free from material misstatement, provide auditors with access to relevant information and staff to conduct an effective audit
Details the nature of the contract between the audit firm and the client, must be signed before the audit starts, purpose is to minimise the risk of understandings, confirm acceptance of the audit, sets out the terms and conditions of the engagement
The engagement letter should be reviewed each year, a new engagement letter should be issued if the scope or context of the assignment has changed eg there is a change of statutory duties due to new legislation, there is a change in professional duties due to new auditing standards, there are changes to other services requested by the client
An auditor may wish to remind the client of the terms of the engagement letter if senior management have changed, there is a change in the ownership of the client, the auditors experience shows the client does not fully understand or appreciate the content/terms of the engagement letter
We begin the audit with a risk assessment, set a preliminary level of materiality, we assess risk by understanding the entity, performing analytical review, professional scepticism will be important
Audit risk - The risk an auditor expresses an inappropriate audit opinion and includes both the risk of material misstatement and detection risk
Risk of material misstatement - The risk that the financial statements are materially misstated before the audit starts
Inherent risk - The susceptibility of a material misstatement in the financial statements assuming there were no internal controls
Control risk - the risk that a material misstatement is not prevented, detected or corrected by the entities internal controls
Detection risk - the risk that the audit does not detect a material misstatement and is comprised of sampling risk and non sampling risk
Sampling risk - the risk that the conclusion drawn from the results of a sample are not consistent with the conclusion that would have been made had all items been tested (ie a non representative sample Is picked)
Non sampling risk - The risk of drawing the wrong conclusions for other reasons
Professional scepticism - A questioning mind, being alert to anything that may indicate a material misstatement and making critical assessments of audit evidence
Professional judgement - Making informed decisions using knowledge, training and experience
Misstatements, including omissions, are considered to be material if they, individually or in the aggregate, could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. Materiality is a subjective matter and should be considered in light of the client's circumstances.
Size - ½ - 1% revenue, 5 - 10% profit before tax, 1 - 2% total assets
Nature - Compliance with laws and regulations, Compliance with debt covenants, Turning a profit into a loss, Transactions with directors
Performance materiality - set at less than the materiality for the financial statements as a whole to ensure smaller individual misstatements are not ignored when in aggregate they would exceed the materiality threshold
Why perform one? Identify risky areas early in the audit, Plan procedures to address these risky areas, To carry out an efficient audit, To reduce the risk of giving an incorrect opinion, Reduce the risk of reputation damage or fines