AUDITING - APPOINTMENT, RIGHTS, DISMISSAL and Resignation of auditors

Prep by: Swedi Zakaria.

TOPIC O4

AC 732

APPPOINTMENT, RIGHTS, DISMISSAL AND RESIGNATION OF AUDITORS

INTRODUCTION

•      The regulatory framework provides increasing focus of attention on the duties both of

Internal Auditors and External Auditors. This is in consistency with requirements of Corporate Governance

•      Auditors are given certain rights under the Companies Acts to ensure that:- Ø  they fulfill their duties and responsibilities, Ø  they maintain independence.

STATUTORY FRAMEWORK OF AUDITORS.

 It is important for all auditors:

Ø  To be aware of the regulatory framework for auditing.

Ø  And to keep up to date with any changes that occur.

Changes in regulations could affect:-

•      The audit role and demand of their services  How audit is performed and the amount of work,

•      The status of auditing.

There is a trend toward globalization within companies and there is similar trend in auditing. This means that auditors need to be aware not only of Tanzanian regulations but also of those other countries covered by audit. 

There is a greater focus on ISAs , that has led to:

Ø  Change of approach and

Ø  Gave more clearly defined roles and rules for auditors

There are different types of regulatory impact affecting the operation of company and auditing:

Ø  But our focus is on:

*  The Companies Act 2002,

*  Public Sector requirements (e.g. Public Finance Act 2001).

AUDITING REGULATIONS BY COMPANIES ACT 2002

Function of the companies Act.

Most audit work involves companies incorporated under Companies Act 2002 which sets out:-

Ø  The requirements for audit

Ø  Rules on appointment, removal, resignation and retirement of auditors.

Ø  Auditors’ rights, duties and qualifications.

 THE AUDIT REQUIREMENTS.

Ø  Not all companies are required to have their accounts audited,

Ø  Many exemptions apply to small and medium sized companies,

Ø  Generally, small private companies are totally exempt from audit requirements,

Ø  Medium-sized companies may file their accounts with the registrar of companies APPOINTMENT OF AUDITORS  [S.170(1) and S.170(2) of the Companies Act (2002)] First Auditors

Ø  This are usually appointed by the directors

Ø  They hold office until the next Annual General Meeting (AGM - S.133)

Ø  If the directors fail to do this, the general meeting may appoint the first auditors.

Subsequent appointments

Ø  Auditors must be appointed annually

Ø  A private company may elect to dispense with annual re-appointment. In this case, there is an automatically re-appointment until there is a resolution to end the appointment.

Ø  The subsequent appointment are usually at each AGM until the next AGM

Ø  Where at the AGM no auditor has been appointed S.170(3) of the Act require that:-

Ø  The company has to inform the registrar

Ø  The Registrar will appoint the auditor

Ø  If the management does remain silent it will be held liable.

Casual vacancy

Ø  A vacancy occurring between AGMs as a result, for example if  the current Auditor :-

Ø  is dead 

Ø  has been removed or 

Ø  has resigned

Ø  The director of the company has the power to appoint an Auditor to fill the casual vacancy

Ø  The surviving Auditor, if any, may continue to act during such vacancy.

Remuneration  

Whoever Appoints the Auditor has the power to fix the remuneration. However, it is usual for members of the GM to delegate this power to the directors.

Independence of Auditors:  

A person do not qualify to be an auditor of a  company or of another company within the same group if the person is:-

Ø  An officer or servant of the company

Ø  A partner of

Ø  Or is in the employment of, either of the above.

The reason is that, the person may not be impartial or could be influenced.

REMOVAL OF AUDITOR

Ø  Statutory provisions of the Companies Act were drafted to ensure that Auditors cannot be removed simply because they have a disagreement with Directors.

Ø  Again it is a member who:-

•      Have the power to remove the Auditor

•      Or to reject proposal by the director of removing the auditor where they (Members) believe that the auditor was doing a good job.

Removal procedures

A company may remove its Auditors before the expiration of the term by ordinary resolution i.e majority of those attending and voting.

But special notice is required, at least 28 days before the date of relevant meeting a notice must be given by the proposer to the company which will be given to members. And within 14 days a notice of such removal, the company must give a notice to the registrar.

The existing Auditor has the right to make written representation to the company concerning the matters which they should be brought it to members’ attention

The company must send a copy of representation to every member to whom a notice of the meeting is sent. Also the Auditor has the right to speak on the AGM where there are matters to be brought to the attention of members.

RESIGNATION AND RETIREMENT OF AUDITORS

Resignation procedures   S. 177(1)

Ø  Auditors may resign prior to the completion of their term of Office

Ø  The auditor may do so by depositing a written notice of resignation at the company’s office. The notice must contain a statement explaining if there are no circumstances connected with resignation that should be brought to the member’s attention or statement of any such circumstances.

     Action by Company

Within 14 days of the receipt of the notice, the company must send a copy to the registrar. If the notice contain a statement of any circumstances which the Auditor consider should be brought to member’s attention, the company must also send a copy to every person entitled to receive copies of the accounts

The auditors right to an EGM

Ø  The Auditors may require the the directors to convene an Extraordinary General Meeting for the purpose of explaining the circumstances connected with the resignation which the Auditors considers should be brought to the member’s attention.

RETIREMENT OF THE AUDITORS

Ø  It is very rare for the Auditors to either resign or to be removed

Ø  Usually, where the Auditor and client decide to pat company, the auditor will simply not offer themselves for re-election at the next AGM

Ø  The statement of circumstance is still required. 

Ø  The provisions of the Companies Act are made such that members and Creditors are made fully aware of the reasons for the Auditor’s resignation. Moreover, they are given measures of protecting the Auditor and their independence by making it impossible to resign because of undue and unacceptable influences and pressure from the directors without such fact being  made public.

AUDITORS RIGHTS AND DUTIES  [ S.176 (1), S.176 (2) and S.176 (3)of the Companies Act 2002]

The Auditors has to perform various duties in order to achieve the overall duty to report on the true and fair view and in order to fulfill these duties various rights are given to auditors.

Duties of an Auditor

The duties are:-

Ø  To report to the members on the true and fair view of the Financial Statements.

Ø  To consider whether the information in the directors’ report is consistent with Financial Statements.

Ø  To give the following detail if not in the Financial Statements.

•      Director’s emoluments, pensions and compensation for loss of office.

•      Details of loans to officers

•      Disclosure of transaction involving directors and other connected persons.

Ø  To form an opinion as to whether:-

•      Proper accounting record have been kept

•      Proper returns have been received from branch not visited by them.

•      The Balance Sheet and the Income Statement or Profit and Loss account are in agreement with accounting records.

•      Any information they think necessary.

Ø  To make any special report in various circumstances.

Ø  To make a statement of circumstances when they cease to hold office.

RIGHTS OF THE AUDITORS

Rights are designed to ensure that auditors are able to to fulfill their duties and responsibilities to members. These rights are fundamental to their independence.

Legally, Auditors have a right:-

•      To access the books of the company

•      To require information from the officers

•      To be involved in any GM of the company

•      To make a representation at meetings considering their removal or resignation

•      To require the directors to call an EGM to discuss circumstances of resignation.

 Right of private companies under elective regimes.

Private companies take advantages of elective regime. Auditors have a certain rights under these regimes:-

•      To receive copies of agreement for the elective regime

•      To be given notice when there is a resolution concerning them in the GM and the power to attend such a meeting

•      To demand that the company to hold a GM at which the accounts are laid.

ACCEPTING AUDIT APPOINTMENTS

Tendering and obtaining work.

Members are entitled to advertise their services and products. The advertising medium should not reflect adversely on the auditor or the profession. The advert should not:-

Ø  Bring the profession into disrepute or bring discredit to the member, firm or accountancy profession

Ø  Discredit the service of others

Ø  Be misleading

Ø  Fall short of local regulatory or legislative requirements

In marketing and promoting themselves and their work individual professional accountants are required by IFAC code of ethics to avoid the following aspects, including:-

v  The creation of false, deceptive or unjustified expectation of favorable results

v  implication of the ability to influence any court, tribunal, regulatory agency of similar body

v  Self laudatory statements that are not based on verifiable facts

v  representation that are likely to cause reasonable person to be misunderstood or deceived

v  Unjustified claims of being as specialist in a particular field of accountancy

However, there are circumstances in which publicity is acceptable. these do include:-

 On any appointment or other activity of a professional accountant in a manner of national or local importance

 On the award of any distinction to a professional accountant

 when a professional accountant is seeking employment or profession business but shall not publicize for subcontract work in a manner, which could be interpreted as seeking to procure professional business.

 booklets and documents bearing the name of a professional accountant giving technical

information

 vacancies for staff communicated to the public through any medium in which comparable staff vacancies appear giving details of the service provided.

 When a professional accountant invites clients staff of other professional accountants to attend a training course /seminars, provided undue prominence is not given to the name of a professional accountant in any booklet or document

 publicizing on behalf of the client's primary for staff towards the intended client's

objectives.

Audit Fee negotiation and low-balling

Audit firms quote a fee based on the estimated hours worked by each member of staff required on the audit, multiplied by the hourly rate plus any travel and other expenses to be incurred during the audit. They may also charge a premium for more complex audits.

Sometimes it appears that firms are charging less than the market rate for an audit, especially when tendering for new clients. This practice is known as low-balling. It is not regarded ethically wrong to charge a low price for an audit in itself. But the auditors must ensure that they carry out an audit work of the quality demanded by the auditing standards and that the ‘cut-price’ audit fee does not call their independence into question. This is still a topical debate!

In negotiating the audit fee the following factors need to be taken care:-

Ø  The audit is perceived to have fluctuating market price as any other commodity or service

Ø  Companies can reduce external audit costs through various legitimate measures including:-

•      Extending size and function of internal audit

•      Reducing the number of different audit firms used world-wide

•      Selling –off subsidiary companies leaving a simplified group structure to audit

•      The tender process itself makes auditors more competitive

•      Exchange rate fluctuations in audit fees

Ø  Auditing firms have increased productivity, partly through the use of more sophisticated information technology techniques in auditing.

Appointment ethics

The present and proposed auditors must communicate with each other prior to the audit being accepted.

Before Accepting nomination     

The client must be asked to give permission for communication to occur. If the client refuses to give permission, the proposed auditor must decline the nomination.

The nominee auditors must carry out the following procedures;-

                Ensure professionally qualified to act

                Ensure existing resources adequate

                Obtain references

                Communicate with present auditors

An example of an initial communication is given below:-

To: Retiring Audit firm

     Certified Auditors

 Dear Sirs, 

               RE: NEW CLIENT Co.LTD

We have been asked to allow our name to go forward for nomination as auditors of the above company, and we should therefore be grateful if you would let us know whether there are any professional reasons why we should not accept nomination……..

Acquiring & Co.

Certified Accountants

Procedures after accepting nomination

The following procedures should be carried out after accepting nomination:-

Ø  Ensure that the outgoing auditor’s removal or resignation has been properly conducted in accordance with national legislation

Ø  Ensure that the new auditor’s appointment is valid. The new auditor should obtain a copy of the resolution passed at the general  meeting appointing them as the company’s auditor

Ø  Set up and submit a letter of engagement to the directors of the company

Ø  Other matters include:-

•  Obtaining all books and papers which belong to the client from the old auditors

•  Client screening e.g management integrity and risk of the client

AUDIT ENGAGEMENT LETTER

ISA 210- Terms of Audit Engagements states that ‘ the auditor and the client should agree on the terms of engagement’. The agreed terms must be in writing and the usual form would be a letter of engagement. 

The engagement letter documents and confirms the auditor’s acceptance of the appointment, the objective and scope of the audit, the extent of the auditor’s responsibilities to the client and the form of any reports.

The engagement letter should contain the following:- Ø The objective of the audit of financial statements

Ø Management’s responsibility for the financial statements

Ø The applicable reporting framework

Ø The scope of the audit, including reference to applicable legislation, regulations, or pronouncements of professional bodies to which the auditor adheres

Ø The fact that due to the test nature and other inherent limitations of an audit, together with the inherent limitations of any accounting and internal control system, there is an unavoidable risk that even some material misstatement may remain undiscovered

Ø Unrestricted access to whatever records, documentation and other information is requested in connection with the audit

Ø The confidentiality of any reports issued, and, if relevant, the terms under which they can be shared with third parties

The auditor may wish to include in the letter the following items;-

•     Arrangements regarding the planning of the audit

•     Expectations of receiving from management written confirmation of representations made in connection with the audit

•     Request for the client to confirm the letters of the engagement by acknowledging receipt of the engagement letter

•     The restriction on the auditor’s liability when such possibility exists

•     Basis on which the fees are computed and any billing arrangements

•     Arrangements concerning the involvement of other auditors and experts in some aspects of the audit

•     Arrangements concerning the involvement of internal auditors and other client staff.

•     Arrangements to be made with the predecessor auditor, if, any in the case of an initial audit.

RECURRING AUDITS

Once agreed by the client, an engagement letter will remain effective from one audit appointment to another until it is replaced. However, it should be reviewed annually to ensure that it continues to reflect the client’s circumstances.

ISA 210 suggests that the following factors may make the arrangement of a new letter appropriate:-

Ø  Any indication that the client misunderstands the objective and scope of the audit

Ø  Any revised or special terms of the engagement

Ø  A recent change of senior management board of directors or ownership committee

Ø  A significant change in the nature or size of the client’s business

Ø  Legal requirements

AUDITOR’S RESPONSIBILITY

It should be kept in mind that the objective of the ordinary audit of financial statements by the independent auditor is the expression of an opinion on the fairness with which they present, in all material respects, financial position, results of operations, and its cash flows in conformity with generally accepted accounting principles.

The auditor's report is the medium through which he expresses his opinion or, if circumstances require, disclaims an opinion. In either case, he states whether his audit has been made in accordance with generally accepted auditing standards. These standards require him to state whether, in his opinion, the financial statements are presented in conformity with generally accepted accounting principles and to identify those circumstances in which such principles have not been consistently observed in the preparation of the financial statements of the current  period in relation to those of the preceding period.

The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. Because of the nature of audit evidence and the characteristics of fraud, the auditor is able to obtain reasonable, but not absolute, assurance that material misstatements are detected.  The independent auditor also has a responsibility to his profession, the responsibility to comply with the standards accepted by his fellow practitioners.

Management is responsible for adopting sound accounting policies and for establishing and maintaining internal control that will, among other things, initiate, authorize, record, process, and report transactions (as well as events and conditions) consistent with management's assertions embodied in the financial statements. The entity's transactions and the related assets, liabilities, and equity are within the direct knowledge and control of management.

The auditor’s are responsible for carrying out an audit in accordance with ISAs. 

ISA 240 The auditor’s responsibility to consider fraud in an audit of financial statements. The auditor’s approach to the possibility of fraud is similar to the approach to the possibility of error. the key requirement for an auditor is to consider during planning the risks of material misstatements in the financial statements due to fraud. 

Overall responsibility of auditor

The external auditor is primarily responsible for the audit opinion on the financial statements following the international auditing standards (ISAs). ISA 240 (Redrafted) The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements is relevant to audit work regarding fraud. The main focus of audit work is therefore to ensure that the financial statements show a true and fair view. The detection of fraud is therefore not the main focus of the external auditor’s work. An auditor is responsible for obtaining reasonable assurance that the financial statements as a whole are free from material misstatement, whether caused by fraud or error. The auditor is responsible for maintaining an attitude of professional scepticism throughout the audit, considering the potential for management override of controls and recognising the fact that audit procedures that are effective for detecting error may not be effective for detecting fraud.

ISA 240 states that the auditor should reduce audit risk to an acceptably low level. Therefore, in reaching the audit opinion and performing audit work, the external auditor takes into account the concept of materiality. In other words, the external auditor is not responsible for checking all the transactions. Audit procedures are planned to have a reasonable likelihood of identifying material fraud.

ISA 320 Audit materiality states that ‘ materiality should be considered by the auditor when:-

Ø  determining the nature, timing and extent of audit procedures

Ø  evaluating the effects of misstatements

REVIEW QUESTIONS

QUESTION ONE:

 If a person described in section 175(1) of the Companies Act (2002) can not be an Auditor, then who is qualified to act as an auditor under the same act?

QUESTION TWO:

Discuss as to how Auditors in Tanzania procure clients for their services and products. 

Hint : Cite some local regulations or legislative requirements.

QUESTION THREE

You are a partner in Magoma Moto & Co, Certified Accountants. You are approached by Mr Msondo Ngoma, the managing director of Nangulukulu Enterprises Ltd who asks your firm to become auditors of his Company. In return for giving you this appointment  Mr.Msondo Ngoma says that he will expect your firm to waive fifty percent of your normal fee for the first year’s audit. The existing auditors, Sikinde & Co, have not resigned but Mr Msondo Ngoma informs you that they will not be re-appointed in the future.

REQUIRED:

a.       What actions should Magoma Moto & Co take in response to the request from Mr. Msondo Ngoma to reduce their first year’s fee by fifty percent?

b.      Are Sikinde & Co. within their rights in not resigning when they know Mr. Msondo Ngoma wishes to replace them? Give reasons to your answer 

QUESTION FOUR

Describe the steps an audit firm should perform prior to accepting a new audit engagement.

QUESTION FIVE

Discuss the External auditor responsibilities regarding detection of fraud. Explain different groups where he/she is supposed to report the fraud.

QUESTION SIX

In agreeing the terms of an audit engagement, the auditor is required to agree the basis on which the audit is to be carried out. This involves establishing whether the preconditions for an audit are present and confirming that there is a common understanding between the auditor and management of the terms of the engagement.

Required:

Describe the process the auditor should undertake to assess whether the PRECONDITIONS for an audit are present. 

QUESTION SEVEN

Discuss the benefits and disadvantages of using International Standards on Auditing (ISAs) over Local standards

QUESTION EIGHT

Auditors have various duties to perform in their role as auditors, for example, to assess the truth and fairness of the financial statements.

Required:

Explain THREE rights that enable auditors to carry out their duties.