Accountants in practice need to carefully consider a number of factors when establishing processes and drafting letters of engagement and disengagement relating to the services they will be or have been providing – and auditors have some particular concerns they must address. Not least, the relevant International Standards on Auditing and what they have to say on such matters, and any legal requirements, such as rules on auditor resignation under the UK Companies Act 2006.
ICAEW’s Technical Advisory Service (TAS) has helpsheets available to assist certain groups of ICAEW members and students, the faculty develops guidance specifically for auditors, while in the UK the Financial Reporting Council (FRC) makes guidance available on requirements for the public interest entity auditors it supervises.
There are links to these materials in the ‘Resources and support’ section at the end of this article
TAS and the faculty regularly review their support materials and make any necessary changes and/or issue new guidance. This article highlights some recent developments.
Engagement letters and privacy notices
In May 2022, after TAS had completed a full review of its ‘Engagement letters and privacy notices’ helpsheet, this was updated. It has been restructured to make related guidance easier to access and download, and there have been some changes to the sample letter wording. These reflect, for example, the UK exit from the European Union and clarifications around aspects of data protection. Updates also reflect recent and forthcoming UK tax-related developments.
Matters of particular interest to auditors include:
- clarification of the communication with those charged with governance of significant facts and matters that may bear upon integrity, objectivity and independence (1.2.9); and
- updated references to the UK’s ‘Statutory Audit and Third Country Auditor Regulations 2016’ (known as SATCAR) in relation to providing information to successor auditors (1.2.11).
The TAS helpsheet update is accompanied by a table that lists what has changed, giving new paragraph references and the nature of changes.
Auditor resignation statements
In April 2022, the faculty issued new guidance on ‘Driving more informative auditor resignation statements’. ICAEW believes that better and more meaningful information about why an auditor has resigned, been dismissed or decided not to participate in a retender could help to ensure transparency and improve the quality of audits (as outlined in its response to the 2021 BEIS consultation.
The May 2022 government response to this BEIS consultation states (in para 7.3.20) that the government will introduce legislation to improve notices of auditors ceasing to hold office for public interest entity audits, in line with Brydon recommendations, but it may be some time before this happens.
Meanwhile, faculty guidance highlights actions that firms can take immediately – in relation to all audited entities – to provide more meaningful information on why an auditor has resigned, been dismissed, or decided not to participate in a retender. There are six areas where the guidance makes suggestions and these are briefly outlined as follows.
1. Requirements and timings
The requirements on auditor resignation are set out in the Companies Act 2006.
When an auditor ceases to act for a company, the auditor ought to be absolutely clear about how the rules impact them, including whether (and by when) they need to make a section 519 statement of reasons for ceasing to hold office and who it needs to go to.
The rules in the Companies Act vary depending on whether the company is a public interest company (PIC) or non-PIC, whether a non-PIC is a public or private company and when the auditor ceased to hold office. Auditors must also consider whether the reasons for resignation are ‘exempt reasons’, such as when the company is no longer required to have an audit. See links to guidance from ICAEW and the FRC, below.
For private companies, it is also worth noting exceptions in relation to deemed reappointment of auditors. ‘Deemed reappointment’ arises where no other auditor has been appointed by the end of the next period for appointing auditors and so the auditor in office immediately before this time is deemed reappointed.
One of the common exceptions is where the auditors have been appointed by the directors. In circumstances where the auditors are appointed by the directors, unless the auditors have been specifically reappointed, they will cease to hold office automatically at the end of the period for appointing auditors, and this is not, therefore, a resignation.
2. Matters to bring to the attention of members and creditors
The Companies Act does not provide guidance on matters that should be brought to the attention of members and creditors. It is left to the auditor’s judgement. Where auditors choose not to participate in a tender for an entity that they have previously audited, a resignation that states just this offers little information to members and creditors about reasons why. There may be specific matters that have had a direct impact on this: for example, the firm reaching the end of the mandatory firm rotation period, a conflict of interest, the audit fee no longer reflecting the extent of work required, a breakdown in relationship between auditor and management, or concerns over the reporting of a company’s financial position or quality of its underlying processes.
Auditors may judge that these matters are of interest to members and creditors.
3. Clear communication and documentation
There may be difficult conversations between those charged with governance of a company and the auditor if its decision to resign comes out of the blue. Auditors should ensure that concerns are brought to the attention of those charged with governance as the audit progresses, and that these issues are clearly documented in their files. This will help to support auditors’ judgements as to what matters to bring to the attention of members and creditors.
Where auditors of non-PICs believe there are no matters that they consider need to be brought to the attention of members and creditors, it is again worth ensuring that this is documented on file, including any discussion of the issues and judgements made. This is particularly relevant if an auditor would hesitate if asked whether they would be happy to take on this audit engagement again.
4. Presentation of s519 statements
In preparing a statement under section 519 of the Companies Act, the auditors are required to include:
- the auditor’s name and address;
- the number allocated to the auditor on being entered in the register of auditors kept under section 1239 of the Act; and
- the company’s name and registered number.
It is helpful to head up the s519 statement with a clear reference to the requirement for this in the Act.
5. A reminder for successor auditors
There is no excuse for failing to read the s519 statements of predecessor auditors who have ceased to hold office. This information can help to inform client acceptance decisions and also the performance of the audit.
6. Quality management systems
Many audit firms are in the process of designing and implementing the systems of quality management required by the new standards on quality management. This includes establishing quality objectives in relation to client acceptance and continuance, and identifying, assessing and responding to quality risks that might threaten the achievement of these objectives. Responses might include policies or procedures to enable auditors to escalate issues within audit firms, for review of resignation statements, and to ensure that the content of resignation statements is appropriately considered in acceptance decisions.
The new faculty guidance also provides background on recent developments. “This is an important area of concern that the wider audit reform agenda has drawn attention to. It is vital that the profession is seen to be proactive in responding to such concerns,” says Nigel Sleigh-Johnson, Director of Audit and Corporate Reporting at ICAEW. “Our guidance should help, but we are keen to hear from ICAEW members and other stakeholders on other actions that could be taken to help drive more informative resignation statements.”
Resources and support
Faculty guidance on ‘Driving more informative resignation statements’ is at https://www.icaew.com/technical/audit-and-assurance/audit/appointment-and-engagement-terms/driving-more-informative-auditor-resignation-statements
TAS helpsheets are available on:
- Engagement letters and privacy notices’, with resources including engagement letter schedule sample wordings, a list of what has changed in the latest version and pointers to other useful helpsheets;‘Auditor resignation – auditor and company responsibilities’;
- Disengagement letters with advice, sample structure and content; and
- there is a ‘Disengagement checklist’ to help you establish appropriate procedures and assess/record reasons underlying disengagement, highlighting issues requiring clarification/action.
Stay up to date on new and recently updated TAS content.
View TAS helpsheets and guidance by topic.
ICAEW’s Library & Information Service (LIS) holds a catalogue of content on engagements letters with related information and guidance. There are online search tools to help you find details of the engagement letters in the LIS collection.
Specialist third-party providers also offer resources to assist with and automate aspects of client onboarding, management and offboarding.
The Financial Reporting Council (FRC) provides guidance for audit firms that it directly supervises. ‘Notifications of change of auditor’ outlines how the notification to the FRC should be made, and what it must cover. This information is provided in the form of:
Audit & Beyond
This article was first featured in the July/August 2022 edition of Audit & Beyond.
