Appointment, Rights and Duties of Auditors

Appointment, Rights and Duties of Auditors

Syllabus tag: KASNEB CPA | Intermediate Level | CA24 Auditing and Assurance | Topic 3 Appointment, Rights and Duties of Auditors

Lesson objectives

By the end of this topic, you will be able to:

• State how an auditor is appointed, removed and resigns
• List the statutory rights of an auditor
• State the auditor's statutory duties
• Explain who may not be appointed auditor
• Describe the procedures on accepting a new engagement

Why this matters

The auditor's rights exist to make the audit possible, and the removal procedure exists to make the auditor hard to dismiss for asking difficult questions. Both are protections for shareholders rather than privileges for the firm.

Appointment

Under the Companies Act 2015, the auditor is appointed by the members in general meeting, and holds office until the conclusion of the next meeting at which accounts are laid.

Exceptions:

• The directors may appoint the first auditor, and may fill a casual vacancy
• Where no auditor is appointed, the Cabinet Secretary may appoint one

The default rule matters. The auditor is appointed by the people the audit protects, not by the management it examines.

Who may not be appointed

• An officer or employee of the company
• A partner or employee of such a person
• A body corporate
• A person disqualified from auditing a subsidiary or holding company of the client
• A person without a valid practising certificate from ICPAK

These are statutory disqualifications, and distinct from the ethical threats in the IESBA Code. A person may be perfectly eligible in law and still be required to decline on ethical grounds.

Removal

An auditor may be removed before the expiry of the term by ordinary resolution of the members, but only with safeguards:

• Special notice must be given to the company
• The company must notify the auditor
• The auditor may make written representations to the members and require them to be circulated
• The auditor may speak at the meeting at which removal is proposed
• The Registrar must be notified

The point of these safeguards is that shareholders hear the auditor's side before voting. Without them, an auditor raising an uncomfortable issue could be removed quietly.

Resignation

An auditor resigns by written notice to the company, which must include either a statement of the circumstances connected with the resignation that should be brought to the attention of members and creditors, or a statement that there are none.

The resigning auditor may also require the directors to convene a general meeting to consider the circumstances.

This mirrors removal. In both cases, the departure cannot be silent if the auditor believes shareholders ought to know why.

Statutory rights

Right	Purpose
Access to books and records at all times	To obtain evidence
To require information and explanations from officers	To pursue questions
To receive notice of and attend general meetings	To be present when accounts are discussed
To speak at general meetings on matters concerning the audit	To be heard
To receive notice of written resolutions	To follow decisions taken outside meetings
To make representations on removal or resignation	To protect independence

The right of access is at all times, not at times convenient to the company. A restriction imposed by management on what the auditor may see is a limitation of scope, with reporting consequences.

Statutory duties

The auditor must report to the members on whether the financial statements:

• Give a true and fair view
• Have been properly prepared in accordance with the applicable framework and the Companies Act

And must state, by exception, where:

• Adequate accounting records have not been kept
• The statements are not in agreement with the records
• Necessary information and explanations were not obtained
• Certain disclosures about directors are not made

Reporting by exception is worth understanding. The auditor says nothing about these matters where all is well, so a report that mentions them at all is signalling a problem. Silence on them is the good outcome.

:::checkpoint The directors decline to let the audit team see the board minutes, saying they contain commercially sensitive matters unrelated to the accounts. State which statutory right is engaged and the possible consequence for the report. :::

Accepting a new engagement

Before accepting, the firm should:

• Assess its independence and identify any ethical threats
• Consider whether it has the competence and resources
• Perform client due diligence — the integrity of management, the reasons for the change, money laundering checks
• Obtain the client's permission to contact the outgoing auditor
• Communicate with the outgoing auditor for any matters bearing on acceptance

If the client refuses permission to contact the outgoing auditor, the firm should decline the engagement. A refusal is itself information.

Once accepted, an engagement letter records the scope, the respective responsibilities of auditor and management, the reporting framework, the form of the report, and the fee basis. Its purpose is to prevent later disagreement about what was agreed.

:::checkpoint A prospective client says the previous auditor was dismissed for being "too slow" and asks you not to contact them, offering a higher fee to begin immediately. Set out your response and your reasoning. :::