Question

You are a member of your audit firm’s quality assurance team. The firm has recently been appointed as the auditors of Windmill Ltd, a company which manufactures a large range of diving and hang-gliding equipment.

The company has been in operation for twenty years. The audit is not complicated as the systems are well established and the staff generally competent. One complication is that before any of the company’s diving equipment can be sold, it must be rigorously quality control tested for safety purposes. In prior years, all year-end inventory has been tested by an independent expert to ensure that it is saleable. The company has an internal audit department. No other services will be rendered to Windmill Ltd.

Having satisfactorily concluded the preliminary engagement activities in terms of ISA 220 and ISQC 1, the manager in charge of the audit requested a trainee to draft an engagement letter. The following engagement letter was provided by the trainee:

The Sharelolders

Windmill Ltd

18 Richards Ave

Whakatane

To the Chairman Having carried out the preliminary investigation into your company, we are pleased to record our acceptance of the appointment as auditors and hereby confirm the terms of the engagement.

1. We will conduct the 30 August year-end audit for which we have been appointed

2. The engagement will end by 31 September

3. Our role is to certify the fair presentation of the financial statements

4. Your role as management will be to provide our staff with all the information we require to gather sufficient, appropriate audit evidence of fair presentation

5. We do not guarantee an unqualified audit report as auditing does have its limitations

6. Fees will be a matter of negotiation, but will be based on prior years

Please would you sign this letter, retain a copy, and return the original to us.

I look forward to working on your audit.

Signed:………….

Audit manager

REQUIRED: Identify any weaknesses in this letter. You are not required to re-draft the letter.

Answer 1

Following are the weaknesses in the above engagement letter drafted by the trainee:

- The engagement letter is addressed to the shareholders. However, it should be addressed to the Board of directors since the appointing authority is the board of directors.

- The role of auditor has not been mentioned clearly. It has not been mentioned that the audit will be conducted in accordance with the applicable framework.

- The engagement letter should be signed either in the name of firm or in the name of engagement partner. However, in this case, the letter is being signed by the Audit manager

- The scope of services has not been clearly spelt out. The deliverables have not been specifically mentioned. Neither has it been mentioned that the audit will entail evaluation of internal controls and preparation of audit report.

- The timeline for completion of services is not clear. Even though it has been mentioned that the engagement will end by 30 September, the starting date has not been mentioned. This can lead to future conflicts.

- The fee structure is ambigous. A specfic amount of estimated fees has not been mentioned. Billing rate for different levels of employees and expected hours to be put in by each grade of employees should have been mentioned. Moreover, provsion for travel expenses and out of pocket expenses should have also been mentioned.

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