Your firm has been approached by the directors of UB Bank Ltd. a newly formed commercial bank to undertake the audit for its first complete...

Your firm has been approached by the directors of UB Bank Ltd. a newly formed commercial bank to undertake the audit for its first complete financial year ended 31 December 1996. Your manager has assigned you the responsibility for leading the team. You have had various discussions with the directors about the timetable and the respective responsibilities of management and the auditor. You have drafted a letter of engagement and have sent it to the managing director for approval and acceptance but the management has not yet responded to your letter.
Required:
a) Explain why a letter of engagement is sent before any new audit appointment is accepted.
b) Set out the main contents of a letter of engagement.
c) Itemise the actions you would take in response to the non-reply by the management to your draft engagement letter.
d) State when it might be necessary to re-draft an engagement letter and have it re-affirmed by the client’s management.

Answers

a. Why the letter of engagement is sent before any new audit appointment is accepted.
Meaning and importance of the letter of engagement.
It is the purpose of a letter of engagement to clearly define the extent of the auditor’s responsibilities and so minimise the possibility of any misunderstanding between the auditor and the client.
It provides a written confirmation of the auditor’s acceptance of the appointment, the scope of the audit, form of his report and scope of non audit services. If a letter of engagement is not sent to clients both new and existing, there is scope for argument about the precise extent of the respective obligations of the clients and its auditors and directors.

b. Contents of a letter of engagement:

• Definition and scope of audit: it should be made clear that an audit involves the examination of and expression of opinion on the financial statements of an enterprise by an appointed auditor in pursuance of that appointment and in the case of a statutory audit, that the matters to be reported upon are laid down in Companies Act 1962 or any relevant legislation.
• Fraud and irregularities: the responsibility of the prevention and detection of errors and frauds rests with the management and this responsibility is fulfilled mainly through the implementation and continued operation of an adequate internal control system.
• Accounting, Taxation and other services: the letter should delineate clearly the accountant’s and the client’s responsibilities in relation to these services and the day to day book-keeping, the maintenance of all accounting records and the preparation of financial statements.
• Fees: mention should be made of fees and the general basis on which fees are computed and rendered.

c. The auditor should ensure that:
• Proper accounting records and returns have been kept.
• The accounts kept are in agreement with the accounting records and returns. If they are not in agreement the directors should readily provide the auditor with all the explanations and information he requires.

d. When it might be necessary to re-draft an engagement letter and have it re-affirmed by the client’s management:
• When there are new clients who have appointed the auditor
• When there is an existing client who has not received it previously in particular statutory audits.
• Where there is a change in circumstances which will lead to change in duties of the auditor e.g. an extra assignment.

Musyoxx answered the question on March 14, 2018 at 15:58

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Your firm has been approached by the directors of UB Bank Ltd. a newly formed commercial bank to undertake the audit for its first complete...

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