Test your understanding 1 You are an audit manager in Weller & Co, an audit firm which operates as part of an international network of firms. This morning you received a note from a partner regarding a potential new audit client: ‘| have been approached by the audit committee of the Plant Group, which operates in the mobile telecommunications sector. Our firm has been invited to tender for the audit of the individual and group financial statements for the year ending 31 October 20X5, and | would like your help in preparing the tender document. This would be a major new client for our firm's telecoms audit department. The Plant Group comprises a parent company and six subsidiaries, one of which is located overseas. The audit committee is looking for a cost effective audit, and hopes that the strength of the Plant Group’s governance and internal control mean that the audit can be conducted quickly, with a proposed deadline of 31 December 20X5. The Plant Group has expanded rapidly in the last few years and significant finance was raised in February 20X5 through a stock exchange listing.’ Required: Identify and explain the specific matters to be included in the tender document for the audit of the Plant Group. (8 marks) i Test your understanding 2 Your firm has been approached by Tomlin Co to provide the annual external audit following the resignation of the previous auditor. The company's year-end is 31 December which is the same as the majority of your firm's other audit clients. Tomlin Co supplies goods to major retailers. Your firm does not audit any other retailers. The company is currently recruiting a new finance director after the previous finance director was found guilty of bribing customers in order to win major contracts. Required: Explain the matters to be considered in deciding whether to accept the appointment as auditor of Tomlin Co. (6 marks)Test your understanding 3 You are a training manager in Hawk Associates, a firm of Chartered Certified Accountants. The firm has suffered a reduction in fee income due to increasing restrictions on the provision of non-audit services to audit clients. The following proposals for obtaining professional work are to be discussed at a forthcoming in-house seminar: (a) ‘Cold calling’ (i.e. approaching directly to seek new business) the chief executive officers of local businesses and offering them free second opinions. (5 marks) (b) Placing an advertisement in a national accountancy magazine that includes the following: ‘If you have an asset on which a large chargeable gain is expected to arise when you dispose of it, you should be interested in the best tax planning advice. However your gains might arise, there are techniques you can apply. Hawk Associates can ensure that you consider all the alternative fact presentations so that you minimise the amount of tax you might have to pay. No tax saving — no fee!’ (6 marks) (c) Displaying business cards alongside those of local tradesmen and service providers in supermarkets and libraries. The cards would read: Hawk ACCA Associates For PROFESSIONAL Accountancy, Audit, Business Consultancy and Taxation Services Competitive rates. Money back guarantees. (4 marks) Required: Comment on the suitability of each of the above proposals in terms of the ethical and other professional issues that they raise. (Total: 15 marks) Test your understanding 4 AB Accountants has been invited to become the auditors of XY Co, a company with a poor reputation since several senior managers were recently convicted of corruption. The company insists that it has now changed its culture, and is hoping that AB Accountants will become its auditors as part of this new ethical outlook. Required: Identify possible safeguards AB Accountants might consider using if it accepts appointment as auditor of XY Co. (4 marks)Test your understanding 1 Matters to be included in tender document Outline of Weller & Co A brief outline of the audit firm, including a description of different services offered, and the firm's membership of an international network of audit firms. This should provide comfort to the Plant Group's audit committee that Weller & Co has the capability to audit its overseas subsidiary, and that the audit firm has sufficient resources to conduct the Plant Group audit now and in the future, given the Plant Group's rapid expansion. Specialisms of Weller & Co A description of areas of particular audit expertise, focusing on those areas of relevance to the Plant Group, namely the audit firm's telecoms audit department. The tender document should emphasise the audit firm's specialism in auditing this industry sector, which highlights that an experienced audit team can be assembled to provide a high quality audit. Identify the audit requirements of the Plant Group An outline of the requirements of the client, including confirmation that Weller & Co would be providing the audit service to each subsidiary, as well as to the parent company, and to the Plant Group. Weller & Co may also wish to include a clarification of the purpose and legal requirements of an audit in the jurisdictions of the components of the Plant Group, as requirements may differ according to geographical location. Identify any audit-related services that may be required Due to the Plant Group's listed status, there may be additional work to be performed. For example, depending on the regulatory requirements of the stock exchange on which the Plant Group is listed, there may be additional reporting requirements relevant to corporate governance and internal controls. This should be clarified and included in the tender document to ensure that the audit committee understands any such requirements, and that Weller & Co can provide an all-encompassing service. Audit approach A description of the proposed audit approach, outlining the stages of the audit process and the audit methodology used by the firm. Weller & Co may wish to emphasise any aspects of the proposed audit methodology which would be likely to meet the audit committee's requirement of a cost effective audit. The proposed audit approach could involve reliance to some extent on the Plant Group’s controls, which are suggested to be good, and the tender document should explain that the audit firm will have to gauge the strength of controls before deciding whether to place any reliance on them.Deadlines The audit firm should clarify the timescale to be used for the audit. This is very important, given the audit committee’s hope for a quick audit. It would be time pressured for the audit of all components of the Plant Group and of the consolidated financial statements to be completed in two months, especially given the geographical spread of the Plant Group, and the public holidays in that time period. The audit firm may wish to propose a later deadline, emphasising that it may be impossible to conduct a quality audit in such a short timeframe. Quality control and ethics Weller & Co should clarify its adherence to the Code of Ethics and to International Standards on Quality Control. This should provide assurance that the audit firm will provide an unbiased and credible auditor's report. This may be particularly important, given the recent listing obtained by the Plant Group, and consequential scrutiny of the financial statements and auditor's report by investors and potential investors. Fees The proposed audit fee should be stated, with a breakdown of the main components of the fee. The audit firm may wish to explain that the audit fee is likely to be higher in the first year of auditing the Plant Group, as the firm will need to spend time obtaining business understanding and ensuring there is appropriate documentation of systems and controls. The tender document could explain that the audit is likely to become more cost effective in subsequent years, when the audit firm has gone through a learning curve. Additional non-audit services The audit firm should describe any non-audit services that it may be able to provide, such as tax services or restructuring services, which may be relevant given the rapid expansion of the Plant Group. The provision of such services would have to be considered carefully by the audit firm due to the threat to objectivity that may be created, so the tender document should outline any safeguards that may be used to reduce risks to an acceptable level. This is particularly important, given the listed status of the Plant Group. This part of the tender document may remind the audit committee members that corporate governance requirements may prohibit the audit firm from offering certain non-audit services.Test your understanding 2 Reason for the previous auditor resigning If they have resigned due to difficulties encountered during the audit, the firm may be concerned that the same issues could occur. Resources As Tomlin Co's year-end is the same as most other audit clients, the firm may not have sufficient audit staff available to assign to the audit. This may lead to the work being rushed which could affect the quality of the audit. Competence As the firm does not audit any other clients in the retail industry, the audit firm may not be sufficiently experienced to deal with such an audit. The firm may not understand the industry laws and regulations and the risks associated with that industry which increases audit risk. Absence of a finance director Without a finance director, the financial reporting processes are not being overseen. The financial statements may not be prepared on time and difficulties could be encountered by the audit team obtaining audit evidence. This could cause work to be rushed to get it finished and material misstatements could go undetected. Bribery The previous finance director was found guilty of bribing customers. This indicates high control risk and may cast doubt over the integrity of management if other directors were aware of the bribery. The audit firm may decide the engagement is too risky to accept. Independence The firm would need to confirm independence from the client. Ethical threats such as self-interest and familiarity should be considered, and whether effective safeguards could be applied. Where effective safeguards cannot be applied, the engagement should be declined. Fees The level of the fee should be considered and whether the fee is acceptable for the amount of work involved and the level! of risk associated with the engagement.Test your understanding 3 (a) Cold calling Tutorial note: Recognising that there are three issues to address (i.e. ‘cold calling’, ‘free’ and ‘second opinions’) is likely to earn more marks than focusing on just one. - Cold calling is prohibited in certain countries, therefore the direct approach may not be suitable. Where cold-calling is allowed, it may still only be permitted for existing business clients (i.e. to offer them additional services). The direct approach to non-business clients may still be prohibited — The fundamental ethical principles must be adhered to. Whilst solicitation which is decent, honest and truthful may be acceptable, cold calling which amounts to harassment is not. - Offering a service for free is not prohibited provided that the client is not misled about future levels of fees. - There are strict ethical codes regarding second opinions (on accounting treatments). Practitioners are advised NOT to provide second opinions, when requested, without following a procedure of contacting the incumbent auditor/accountant. Tutorial note: Second opinions should only be given where the auditor has been given permission to speak to the original auditor to ascertain the information available to them at the time of their report. The second auditor should not consider any information that became available subsequently. (b) Tax planning - Advertising is generally allowed subject to the observance of the fundamental ethical principles. — Where advertising is permitted, the minimum requirements are that it be decent, honest, truthful and in good taste. These criteria may not be met in this proposal - ‘The best tax planning advice’ is likely to be a self-laudatory statement and not based on verifiable facts. This may be an unjustifiable claim of expertise or specialism in the field of tax. This may also be making an unjustifiable comparison with other professional accountants in public practice. — ‘Can ensure ...’ and the assertion of ‘all’ may not be a supportable claim, therefore the advertisement is not honest in this respect.(c) There is a fine line between tax avoidance and tax evasion and ‘techniques you can apply’ and ‘alternative fact presentations’ may lean toward the latter and so not be in keeping with the integrity of the profession. This statement may imply an ability to influence taxation authorities. The assertion of being able to ‘minimise the amount of tax’ may expose Hawk Associates to litigation. The engagement risk associated with taking on this work would be high and so should carry commensurately high fees. Expectations of favourable results (lower tax liabilities) may be unjustifiable or created deceptively. The ‘no tax saving — no fee’ offer does not compensate for the risk associated with undertaking the work advertised. Contingency fees, whereby no fee will be charged unless a specific result is obtained, are prohibited except for certain services such as insolvency. Business cards Business cards may be considered a form of stationery and should be of an acceptable professional standard and comply with legal and member body requirements concerning names of partners, principals, professional descriptions, etc. An advertisement the size of a business card would be sufficient to provide a name and contact details and in this respect is suitable. However, the danger of giving a misleading impression is pronounced when there is such limited space for information. The tone of the advertisement may discredit the ACCA name. It is also unsuitable that it seeks to take unfair advantage of the ACCA name. Although the ACCA mark can be used by Hawk Associates on letterheads and stationery (for example) it cannot be used in any way which confuses it with the firm. The emphasis on ‘professional’ may be unsuitable as it could suggest that other firms are not professional. It is unlikely that any professional would offer money back. In the event of dispute (e.g. over fees), the matter would be taken to arbitration (with their member body) if a satisfactory arrangement could not be reached with the client. A tradesman may guarantee the quality of his work and that it can be made good in the event that the customer is not satisfied. However, an auditor cannot guarantee a particular outcome for the work undertaken (e.g. reported profit or tax payable). Most certainly an auditor cannot guarantee the truth and fairness of the financial statements in giving an audit opinion.Test your understanding 4 AB Accountants must weigh up the possible costs and benefits of accepting appointment. The firm should apply safeguards such as: ° Performing client due diligence in accordance with money laundering regulations. ° Obtaining a detailed knowledge of the client before accepting nomination. e — Securing the client's commitment to implement strong internal controls and the highest standards of corporate governance. ° Allocating the senior partner of the firm to be the engagement partner rather than a more junior partner. ° Performing an engagement quality control review. If the firm does not believe that any such safeguards could reduce the threats to an acceptable level, then the firm should decline the appointment.