APPOINTMENT OF AN

AUDITOR AND CLIENT

ACCEPTANCE
• APPOINTMENT
• RIGHTS
• DISMISSAL
• RESIGNATION OF AN AUDITOR
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:
-they fulfill their duties and responsibilities,
-they maintain independence.
STATUTORY FRAMEWORK OF AUDITORS.
It is important for all auditors:
• To be aware of the regulatory framework for auditing.
• 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.
AUDITING REGULATIONS BY COMPANIES ACT 2002
Function of the companies Act.
Most audit work involves companies incorporated under Companies Act 2002
which sets out:-
 The requirements for audit
 Rules on appointment, removal, resignation and retirement of auditors.
Auditors’ rights, duties and qualifications.

THE AUDIT REQUIREMENTS.

• Not all companies are required to have their accounts audited,
• Many exemptions apply to small and medium sized companies,
• Generally, small private companies are totally exempt from audit requirements,
• 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
• This are usually appointed by the directors
• They hold office until the next Annual General Meeting (AGM - S.133)
• If the directors fail to do this, the general meeting may appoint the first auditors

Subsequent appointments
• Auditors must be appointed annually
• 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.
• The subsequent appointment are usually at each AGM until the next AGM
• Where at the AGM no auditor has been appointed S.170(3) of the Act require that:-
• The company has to inform the registrar
• The Registrar will appoint the auditor
• If the management does remain silent it will be held liable.
Casual vacancy
A vacancy occurring between AGMs as a result, for example if the
current Auditor :-
• is dead
• has been removed or
• has resigned
• The director of the company has the power to appoint an Auditor to
fill the casual vacancy
• 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:-
• An officer or servant of the company
• A partner of
• 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
Statutory provisions of the Companies Act were drafted to ensure that Auditors cannot be removed
simply because they have a disagreement with Directors.
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)
Auditors may resign prior to the completion of their term of Office
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
The Auditors may require 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
It is very rare for the Auditors to either resign or to be removed
Usually, where the Auditor and client decide to pat company, the
auditor will simply not offer themselves for re-election at the next
AGM
The statement of circumstance is still required.
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:-
To report to the members on the true and fair view of the Financial Statements.
To consider whether the information in the directors’ report is consistent with Financial Statements.
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.
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.
To make any special report in various circumstances.
 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 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.
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:-
• Bring the profession into disrepute or bring discredit to the member, firm or accountancy
profession
• Discredit the service of others
• Be misleading
• 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:-
• The creation of false, deceptive or unjustified expectation of favorable results
• implication of the ability to influence any court, tribunal, regulatory agency of similar body
• Self laudatory statements that are not based on verifiable facts
• representation that are likely to cause reasonable person to be misunderstood or deceived
• 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:-
• The audit is perceived to have fluctuating market price as any other commodity or service
• 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
• 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:-
Procedures after accepting nomination
The following procedures should be carried out after accepting
nomination:-
• Ensure that the outgoing auditor’s removal or resignation has been
properly conducted in accordance with national legislation
• 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
• Set up and submit a letter of engagement to the directors of the company
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:-
 The objective of the audit of financial statements
Management’s responsibility for the financial statements
The applicable reporting framework
 The scope of the audit, including reference to applicable legislation, regulations,
or pronouncements of professional bodies to which the auditor adheres
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
Unrestricted access to whatever records, documentation and other
information is requested in connection with the audit
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:-
• Any indication that the client misunderstands the objective and scope of the
audit
• Any revised or special terms of the engagement
• A recent change of senior management board of directors or ownership
committee
• A significant change in the nature or size of the client’s business
• 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.
• 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
skepticism throughout the audit, considering the potential for
management override of controls and recognizing 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:-
determining the nature, timing and extent of audit procedures
evaluating the effects of misstatements