The partners of Progressive Audit Services LLP (PAS), a specialized UK-based audit services firm, are considering performing
Question:
The partners of Progressive Audit Services LLP (PAS), a specialized UK-based audit services firm, are considering performing audit services for a proposed new client, JT Industries Group plc (JTI). The principal activity of JTI is the manufacture, import and supply of specialized components, including fan blades, to manufacturer- assemblers of gas turbine engines for the UK-based and EU-based aerospace sector. JTI’s ordinary shares are traded on the London Stock Exchange and it has funded its recent acquisitive growth by placing a number of new share issues with its existing institutional shareholders. Together the institutional shareholders control more than 50% of the voting shares of JTI. Due to the size of the fair value of JTI’s most recent acquisition relative to the book value of JTI’s own net assets, the acquisition was subject to shareholder approval in an extraordinary general meeting (EGM) of shareholders. The necessary shareholder approval was granted, the acquisition was completed, and the post-acquisition integration plan is proceeding well despite the restructured management team being overly-stretched beyond the resources that they have available to them. JTI has a board of eight directors, comprising a non-executive chairman, four further non-executive directors and three executive directors. The executive directors are Malcolm Jones (the CEO), Darren White (the CFO) and Judith Long (the COO). The audit committee of JTI’s board has three members, two of which (including its chair) are qualified accountants with extensive professional experience. The head of JTI’s internal audit function reports to the audit committee and the scope of internal audit’s activities is planned and agreed annually. The audit committee meets once a month, the day before JTI’s monthly board meeting and, amongst its usual business, it reviews the monthly management accounts and any significant variances from budget. It prepares a brief board report for presentation to the board meeting by the chair of the audit committee. PAS have been offered the new audit opportunity after a rigorous selection process conducted by the audit committee. The previous auditors had resigned after conducting preliminary audit work relating to JTI’s financial statements for its current financial year. All regulatory requirements were dealt with following the resignation. PAS’s preliminary audit work included an examination of the financial information relating to the group’s most recent acquisition. Since this is a prospective new audit client, PAS is to follow appropriate audit risk mitigation practices for taking on a new audit client, including undertaking proper audit planning procedures and putting in place an agreed engagement letter before audit work begins.
Questions:
What formal steps do PAS need to take before they accept the audit appointment?
Briefly identify and describe the key steps of audit planning that PAS will need to undertake if they agree to provide audit services to JTI.
Describe the three principal types of risk connected with PAS providing audit services to JTI.
What is the purpose of PAS having an engagement letter with JTI? Briefly describe two of the key parts of an engagement letter.