Middletons & Gramjon Limited
a) Describe the matters that the partners of Middletons should have considered and the procedure(s) the firm should have carried out in determining whether it should accept the appointment as auditors to Gramjon Limited. The most general definition of an audit is an evaluation of a person, organization, system, process, project or product. Audits are performed to ascertain the validity and reliability of information, and also provide an assessment of a system's internal control. (Wikipedia, 2009) Auditors have to do a lot of research on a firm before accepting an appointment. The main matters they must consider are; • Fees – It is recommended that fees from any one client should not surpass 15% of the gross fees of the audit firm. • Legislation – Auditors must be familiar with the most recent Companies Act and follow the International Standards on Auditing. • Ethics – All auditors are bound by codes of professional ethics under ISA 200. These include integrity, independence, objectivity, confidentiality and professional competence. • Conflicts of interest – The auditor should not make any executive decisions for the company, or provide any accounting assistance. It is the responsibility of the management to prepare the statements, the auditor just checks and verifies the items. • Resources – This includes making sure that staff within the firm possess the adequate skills to fulfill their duties. This is important because it is the responsibility of the management to prepare the financial statements – the auditors just check them. Similarly, it is important other employees can do their jobs properly, or the statements may be prepared on a false basis.
Boynton and Johnson (2006) outline six procedures that an auditor should undertake when deciding whether to accept an appointment; • Evaluating integrity of management – The auditor must be confident that the management of the firm can be trusted. Error and irregularity is more likely when the managers are deceitful. In order to assess the integrity of management, an auditor should do two things; 1. Contact the previous auditors of the firm to make sure the firm is not trying to cover up a misstatement in the accounts. 2. Enquire with third parties who have dealt with the firm, such as banks and creditors. As Gramjon are a new client for Middletons, these steps should be carried out in order to ensure management integrity. If Gramjon do not give permission for the prior auditors to be contacted, or the auditors fail to respond, Middletons should refuse the appointment.
• Identifying special circumstances and risks – Auditors need to be aware of the people who will be reading and relying on the financial statements the firm has produced. This may require the auditor to write the audit report in a specific way so everyone can understand it. Also, he must consider the level of risk involved in performing the audit.
• Assessing competence to perform the audit – Before the audit begins, the auditor must ensure he can conduct the audit with professional capability. This consists of identifying the audit team and considering the need to contact specialists. An audit team usually includes a partner who is responsible for the engagement, managers that have experience within the industry and staff who perform audit procedures. In this case, a computer specialist is also required to evaluate the computerized controls.
• Evaluating independence – The Companies Act 1989, s27 (ineligibility on ground of lack of independence) states that a person is ineligible for appointment as company auditor of a company if he is; (a) an officer or employee of the company, or
(b) a partner or employee of such a person, or a partnership of which such a person is a partner, or if he is ineligible by virtue of paragraph (a) or (b) for appointment as company auditor of any associated undertaking...
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