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- 10 Marks
Question
Ayesu & Associates, a reputable auditing firm, was approached by Kumanji Ltd to conduct an annual financial audit for the fiscal year ending December 31, 2023. Below is the audit engagement letter.
Re: Engagement Letter for the Audit of Financial Statements of Kumanji Ltd
We are pleased to confirm the terms of our engagement for the audit of your financial statements for the year ended December 31, 2023. This letter will serve as our agreement with Kumanji Ltd and outlines the scope of our services, responsibilities, and fee structure. Please review this letter carefully and let us know if you have any questions or concerns.
Audit Period: The audit will cover the financial statements of Kumanji Ltd for the fiscal year beginning January 1, 2023, and ending on March 31, 2023.
Audit Fees: Our fee structure will be based on a fixed fee of GH¢5,000 for the audit, payable in two installments. The first installment of GH¢2,500 will be due at the commencement of the audit, and the remaining GH¢2,500 will be due upon completion of the audit.
Timeline for Reporting: We will deliver the audit report and financial statements to you within two months after the conclusion of our fieldwork.
Conflicts of Interest: We do not anticipate any conflicts of interest that may affect our independence or objectivity during the audit. If any conflicts arise, we will address them promptly.
Audit Scope: We will perform audit procedures in accordance with Generally Accepted Auditing Standards (GAAS) to obtain reasonable assurance about whether the financial statements are free from material misstatement. Specific audit procedures will be determined during the audit process.
Contingency Plan: We do not have a contingency plan in place for unexpected disruptions or events that may affect the audit process.
Please acknowledge your agreement to the terms outlined in this letter by signing and returning a copy to us at your earliest convenience. If you have any questions or require clarification on any aspect of this engagement, do not hesitate to contact us.
We look forward to working with you and providing high-quality audit services to Kumanji Ltd. Thank you for entrusting us with this important engagement.
Required:
In accordance with ISA 210: Agreeing the terms of audit engagements, discuss FIVE (5) issues with the engagement letter. (10 marks)
Answer
Issues with the engagement letter
- The audit period mentioned is incorrect, spanning only three months instead of a full fiscal year. Financial statements are typically prepared over a period of 12 months. The client has indicated that the financial statement ends on 31 December and so there is a mistake on the date ending 31 March instead.
- The objective of the audit not clearly spelt out and the scope indicates that the audit will follow GAAS. GAAS is not applicable to Ghana. The audit needs to follow ISAs instead.
- The letter failed to indicate the responsibilities of the auditor. To reduce the audit expectation gap, ISA 210 recommends that the auditor’s responsibility is clearly spelt out in the engagement letter.
- The letter failed to indicate the responsibilities of management. An audit in accordance with ISAs is conducted on the premise that management has acknowledged and understands that it has the responsibilities. The concept of an independent audit requires that the auditor’s role does not involve taking responsibility for the preparation of the financial statements or for the entity’s related internal control, and that the auditor has a reasonable expectation of obtaining the information necessary for the audit in so far as management is able to provide or procure it. Accordingly, the premise is fundamental to the conduct of an independent audit. To avoid misunderstanding, agreement is reached with management that it acknowledges and understands that it has such responsibilities as part of agreeing and recording the terms of the audit engagement.
- The letter failed to identify the underlying financial reporting framework for the audit. In accordance with ISA 210 the auditor is required to determine whether the financial reporting framework, to be applied in the preparation of the financial statements, is acceptable. In some jurisdictions, law or regulation may prescribe the financial reporting framework to be used in the preparation of general-purpose financial statements for certain types of entities. In the absence of indications to the contrary, such a financial reporting framework is presumed to be acceptable for general-purpose financial statements prepared by such entities.
- ISA 210 requires reference to the expected form and content of any reports to be issued by the auditor and a statement that there may be circumstances in which a report may differ from its expected form and content. This is missing from the letter.
- The fee structure is vague, specifying a fixed fee but not indicating the basis on which the fees are computed.
- The timeline for reporting is unreasonably short, potentially causing delays and difficulties in completing the audit.
- The contingency plan is not addressed, leaving the engagement vulnerable to unforeseen disruptions.
(Any 5 points @ 2 marks each = 10 marks)
- Tags: Audit Engagement, Audit Planning, Engagement letter, ISA 210
- Level: Level 3
- Topic: Practice management, The audit approach, The regulatory environment
- Series: MAR 2024
- Uploader: Sarah