Question Tag: Competence

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  • 3 Marks

AA – Dec 2022 – L2 – Q5b – Audit and Assurance Risk Environment

Describes the factors that auditors should consider when assessing the competence and objectivity of an expert.

ISA 620: Using the Work of an Expert explains how an auditor may use an expert to obtain audit evidence.

Required:
State THREE (3) factors that the external auditor should consider when assessing the competence and objectivity of the expert.

Factors to consider when assessing the competence and objectivity of an expert:

  • The expert’s professional qualifications, including membership in relevant professional bodies.
  • The expert’s experience and reputation in the specific area of expertise required for the audit.
  • The independence of the expert from the client, ensuring no conflicts of interest exist.
  • 10 Marks

AAA – Nov 2020 – L3 – Q1a – Rules of professional conduct | Professional responsibility and liability

Evaluate ethical issues in providing audit and advisory services, and assess auditor liability to a bank if the audit is negligently performed.

You are an audit manager with AA & Co. Chartered Accountants and Business Consultants. You have been assigned to the audit of Western Decors Ltd (WD), a long-established firm of event planning service in the city where your practice is located. The audit of the financial statements for the year ended 31 March 2019 is due to commence shortly. The audit firm is aware that the client has received a loan from the bank in April 2018 and that the bank will rely on the audited financial statements as part of the terms and conditions in the loan agreement.

The partner in charge of AA & Co. has just visited the client and made the following notes during his trip:

  • The firm has a number of individual and corporate clients outside Accra and has invested heavily in recording and broadcasting equipment to allow some events to be broadcasted over the internet. This facility is now available at all events conducted in WD’s premises and is proving to be very popular. To date, no specific extra charge has been levied for this service but the Chief Executive Officer (CEO) of WD has asked us to prepare a report for him advising on whether it would be practical to charge separately for it; and, if so, the level at which the charge should be set.
  • Unfortunately, WD’s main supplier of chairs went into liquidation during the year. The Partner said that they were fortunate to be able to find an alternative supplier with whom they entered into a three-year contract for the supply of chairs. At the time of signing the contract, WD considered the contract to be on very favourable terms. However, the supplier is based in Nigeria and the contract was denominated in Naira. Movements in the exchange rate now make the contract look far less attractive and the CEO has requested that we examine the contract to see if there is any way he can legally set it aside.

Required:

i) Critically evaluate any possible ethical issues arising from the client’s requests. (4 marks)

ii) Discuss whether the auditors may be liable to the bank in case the audit was negligently done. (6 marks)

i) Ethical Issues Arising from Client’s Requests:

  • Independence Threat: Providing advisory services such as recommending pricing strategies for broadcasting services and reviewing contracts for legal viability could impair the auditor’s independence. This is particularly relevant since these services may create a self-review threat where the auditor might be perceived as reviewing their own work.
  • Advocacy Threat: The request to provide a report on pricing for broadcasting services and the possibility of setting aside a contract denominated in Naira may create an advocacy threat, where the auditor might be seen as advocating for the client’s position rather than maintaining an objective stance.
  • Competence: The audit firm must consider whether it has the necessary competence to provide legal advice on setting aside a contract. Legal expertise may be required, and the audit firm must ensure that it does not overstep its professional boundaries.
  • Management Responsibility: The auditor should ensure that management, not the auditor, makes any final decisions regarding pricing or legal matters. The auditor can advise but should not assume management responsibilities.

ii) Auditor’s Liability to the Bank if the Audit was Negligently Done:

  • Duty of Care: The auditor owes a duty of care to the bank, especially since it is known that the bank will rely on the audited financial statements as part of the loan agreement. This establishes proximity and reliance, making it foreseeable that the bank would suffer a loss if the audit is negligently performed.
  • Breach of Duty: If the audit is performed negligently, for example, by failing to detect material misstatements or by not adhering to relevant auditing standards, the auditor would be in breach of this duty of care.
  • Causation: The bank would need to prove that the auditor’s negligence directly caused its financial loss. If the bank relied on the audited financial statements to make lending decisions and those statements were materially misstated due to negligence, causation would likely be established.
  • Financial Loss: The bank must demonstrate that it suffered a financial loss as a direct result of relying on the negligently audited financial statements. If these elements are proven, the auditor could be held liable for damages to the bank.

(6 marks)

  • 10 Marks

AAA – May 2016 – L3 – Q2a – Practice management | Professional responsibility and liability

Advise on the matters to consider in relation to accepting a new audit client according to ISQC 1.

Papa Nii and Papa Nana who just qualified as Professional Accountants have decided to enter into professional practice under a firm name Nana Nii & Associates. These two have been trainee accountants of an Audit and Assurance firm for three years before qualifying.

For their first engagement, the CEO of Mberdane Ltd. has nominated Nana Nii & Associates for appointment as auditors of his company though Mberdane Ltd was a former client of their former firm, Papa Nii and Papa Nana were never on the engagement team of Mberdane Ltd. As beginners, Papa Nii and Papa Nana have intended to follow best practices as required by ISQC 1 “Quality control for firms that perform audits and reviews of financial statements, and other assurance related services”. However, they are not clear on the matters that they have to consider in their acceptance decision according to the standard. They have approached you, a senior partner of their former firm, for advice.

Required:
Advise Papa Nii and Papa Nana on the matters that they may have to consider in relation to the acceptance decision on their nomination. (10 marks)

The standard, ISQC 1 provides three main issues to be considered for acceptance of nomination. These are the integrity of the client, the competence of the firm, and ethical requirements.

Matters to consider on the integrity of a client include:

  • The identity and business reputation of the client’s principal owners, key management, related parties, and those charged with governance.
  • The nature of the client’s operations, including its business practices.
  • Information concerning the attitude of the client’s principal owners, key management, and those charged with governance towards matters such as aggressive interpretation of accounting standards/internal control environment.
  • Whether the client is aggressive with fixing and maintaining the firm’s fees as low as possible.
  • Any indication of an inappropriate limitation on the scope of work.
  • Any indication that the client might be involved in money laundering or other criminal activities.
  • The reasons for the proposed appointment of the firm and non-reappointment of the previous firm.

Matters to consider on the competence of the audit firm include:

  • Knowledge of the relevant industry by the firm’s personnel.
  • Experience with relevant regulatory or reporting requirements.
  • Personnel with the necessary capabilities and competence.
  • Availability of experts if needed.
  • Ability to complete the engagement within the reporting time.

Ethical issues include:

  • The firm must consider whether acceptance of the nomination will create any conflict of interest or other ethical issues.
  • The firm must ensure that the previous auditors have been properly removed in accordance with the law.

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