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- 10 Marks
Question
A medium-sized fast-growing company owned by the Basoah Family approached Fast and Easy Accounting Firm (FFAF) and explained that they want to change their auditors to a firm that can provide a broader range of services and support than what they receive from their current auditors. They have asked that FFAF should perform the following roles as auditors of the company if they are engaged:
- Supervision of the company’s routine bookkeeping and payroll systems which will be outsourced to render the present bookkeeping and payroll staff redundant.
- FFAF would then employ the redundant staff and use them to perform the bookkeeping and payroll tasks.
- The company would continue to provide office space for these members of staff, but they would be employed and supervised by FFAF.
- The company will, however, continue to prepare financial statements. They will prepare the financial statements from the trial balance generated by the computerized bookkeeping package provided by FFAF.
- The company is determined to have a good quality service, both from the bookkeeping function and from the external audit, and they are ready to pay a realistic audit fee to maintain FFAF as their External Auditors.
Required:
Assuming that FFAF accepts this appointment, explain how the firm would organize its audit work to ensure that the associated self-review threat is reduced to an acceptable level. (10 marks)
Answer
- The appointment will have to be defined very clearly in the letter of engagement. The company will have to confirm a detailed description of the limits of FFAF’s responsibility for the preparation of the bookkeeping records and the audit of the financial statements. The terms of the engagement should make it clear that the audit firm will take no direct part in the preparation of financial statements.
The responsibility for selecting accounting policies and making significant accounting estimates and judgments should remain with the company’s management. - The company’s management should agree that it will accept full responsibility for all matters of judgment, including the preparation of journal entries. Audit firm staff will only undertake work of a routine and mechanical nature.
- The audit firm should ensure that the staff members responsible for the work undertaken have nothing to do with the audit itself. They will have had no prior connection to the company because this is a new audit. The supervision of the bookkeeping work might also be made the responsibility of a different partner from the person responsible for the audit.
- The bookkeeping staff should not be granted access to audit working papers. The audit staff should treat them with no more trust and familiarity than they would other members of the company’s staff.
- Any assertions made by the bookkeeping staff should be subject to the same degree of checking as would be the case if made by a direct employee of the company.
- The company should be asked to agree in writing that it will appoint the bookkeeping staff appointed by the audit firm in the event of the firm being removed from office. The only proviso might be that the individual employees’ performance must be deemed satisfactory by the company.
(Any 5 points well explained for 10 marks)
- Tags: Audit Independence, Engagement letter, Self-review threat
- Level: Level 3
- Topic: Practice management, Professional responsibility and liability
- Series: NOV 2018
- Uploader: Dotse