Communications Between Predecessor and Successor Auditors
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AU Section 315
Communications Between Predecessor and Successor Auditors
(Supersedes SAS No. 7.) Source: SAS No. 84; SAS No. 93. Effective with respect to acceptance of an engagement after March 31, 1998, unless otherwise indicated.
Introduction
.01 This section provides guidance on communications between predecessor and successor auditors when a change of auditors is in process or has taken place. It also provides communications guidance when possible misstatements are discovered in financial statements reported on by a predecessor auditor. This section applies whenever an independent auditor is considering accepting an engagement to audit or reaudit (see paragraph
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This obligation applies whether or not the successor auditor accepts the engagement.
Communications Before Successor Auditor Accepts Engagement
.07 Inquiry of the predecessor auditor is a necessary procedure because the predecessor auditor may be able to provide information that will assist the successor auditor in determining whether to accept the engagement. The successor auditor should bear in mind that, among other things, the predecessor auditor and the client may have disagreed about accounting principles, auditing procedures, or similarly significant matters. .08 The successor auditor should request permission from the prospective client to make an inquiry of the predecessor auditor prior to final acceptance of the engagement. Except as permitted by the Rules of the Code of Professional Conduct, an auditor is precluded from disclosing confidential information obtained in the course of an engagement unless the client specifically consents. Thus, the successor auditor should ask the prospective client to authorize the predecessor auditor to respond fully to the successor auditor 's inquiries. If a prospective client refuses to permit the predecessor auditor to respond or limits the response, the successor auditor should inquire as to the reasons and consider the implications of that refusal in deciding whether to accept the engagement. .09 The successor auditor should make specific
- The successor should review previous audits in order to whether problems exist that may impact the successor’s acceptance of the audit. Also, the successor should review previous audits in order to have confidence in the current/past figures presented on the client’s financial
As indicated by PCAOB, the written representation cannot be a substitute for substantive procedures. Thus, auditors did not perform adequate procedures to test the management’s estimates. What’s more, inquires were heavily relied on the management’s integrity. Auditors ignored the professional skepticism. Finally, the 30 years and 15 years useful lives, which were adopted previously by Little Drummer, were not appropriately audited. Since the engagement team did not contact the predecessor auditors, the team did not get any audit documents from predecessor auditors regarding the assumptions of 30 years and 15 years. There was no evidence to show the reasonableness of these two assumptions.
The auditor must review disclosures for adequacy, and if the auditor concludes that information disclosures are not reasonably adequate, the auditor must state so in the auditor’s
A predecessor auditor is an auditor who has reported on the most recent audited financial statements or was engaged to perform but did not complete an audit of the financial statements, and has resigned, declined to stand for reappointment, or been notified that his or her services have been, or may be, terminated. The successor auditor is an auditor who is considering accepting or has already accepted an engagement to audit financial statements, but has not been in communication with the predecessor auditor. Communication between the predecessor and successor auditor is very important as it can yield important information as to whether or not the successor auditor should accept the engagement. There are many possible reasons why the predecessor auditor is no longer serving the client. Whether it was a disagreement on accounting principle, audit procedures, adequate disclosures, limiting the audit scope, or a multitude of other reasons, the successor auditor will need this information
The current Canadian Auditing Standard [CAS] 610 has an exposure draft that is being reviewed currently to replace
(c) deleting ‘unconditional’ from paragraph 69(d) of the Standard so that ‘an unconditional right’ is replaced by ‘a right’.
4. What is the purpose of predecessors-successor auditor communications? Which party, the predecessor or successor auditor, has the responsibility for initiating these communications? Briefly summarize the information that a successor auditor should obtain from the predecessor auditor.
2. Auditors are required to consider evidence obtained and accumulated throughout the audit and make an overall evaluation as to whether substantial doubt exists with respect to the ability of the client
The successor auditor is the auditor who is considering accepting or has already accepted engagement with the new firm. Communication between the predecessor and the successor is important. This information can bring about many issues such as “the predecessor auditor and the client may have disagreed about accounting principles, auditing procedures, or similarly significant matters” (PCAOBUS.org, 2013). The successor auditor should initiate the communication with the predecessor. The reason behind the successor auditor initiating the communication is to obtain valuable information that can lead to whether or not they should accept the engagement. The successor auditor may only request reasonable information to the predecessor auditor pertaining integrity of management, disagreements in accounting principles, auditing procedures, and or other significant matters. In addition, successor auditor can establish communication with audit committees or other with equivalent authority regarding “fraud, illegal acts by clients, and internal control related matters” (PCAOBUS.org, 2013). There are laws of confidentiality that the predecessor must abide by. The predecessor must maintain confidentiality at all times. Due to this confidentiality laws
The Congressional subcommittee showed interest in whether there were any communications between the predecessor-successor auditors. Greenspan, a predecessor auditor of ZZZZ Best stated that it is protocol for a successor auditor to initiate communications. However, it is now required by auditing standards (AU 315) that a successor auditor has to communicate with predecessor auditor for prospective client. The purpose for this communication
For any audit engagement APES 110 section 100.5 sets out five fundamental principles that all audit members must abide by (Gay & Simnett 2012, p. 86). They must act with integrity, objectivity and not allow bias. They need to ensure professional competence, confidentiality and comply with the relevant legislation (Gay & Simnett 2012, p. 86). As such one of the principle requirements for auditors is auditor independence from their clients. In Harris-Scarfe’s case, this was not possible because the deputy chairman used to be a partner at Price Waterhouse, the firm’s auditors (Buchanan 2004, p. 69).
2Arguments for why auditors should not be allowed to perform these services for the same client include:
As auditors, they have the responsibility of not only requesting a confirmation, but they should also follow up on necessary procedures to make sure that this process is accurately completed. Their duty is to be able to have control over this process from beginning to end in order to be able to rely on the evidence requested.
The reason for the predecessor-successor auditor correspondence is to advise the successor auditor of the way of the business and particular ascribes of the customer to figure out whether the successor auditor needs to go up against them as a customer. It is the obligation of the successor auditor, with the consent of the client, to start correspondence with the predecessor auditor. The successor auditor needs to gather data on if there are any regions to give careful consideration to that are more inclined to misreports, the proficiency/adequacy of internal controls and if there is anything particular to run over with the administration or management of the company, how is the relationship with administration/ management of the company, if in case that they are consistent, and possibly most imperative, the main reason behind the switch.
In such a case, the company must send a copy of the proposed resolution to the person proposed to be appointed and to the outgoing auditor. The outgoing auditor may make written representations relating to the proposed resolution within 14 days after receiving the notice and request that the representation be circulated to members of the company. Where the auditor ceases to hold office, section 519 requires a statement for the reason of ceasing to hold office to be deposited with the company, submitted to the Registrar and notified to the audit authority. The auditor is also required either to state that there are no circumstances connected with his or her resignation that need be brought to the attention of members or creditors of the company, or to set out what are the circumstances for his resignation to be circulated by the company. The publication of the auditor's resignation statement was proposed by the UK CLR and was accepted by the UK Government. The rationale was that the publication will enable investors to understand the reasons for the resignation of the auditor and will result in greater understanding and transparency and reduce speculations against the company or the auditors.