1193 Communications with a successor auditor

Jun-2019

OAG Guidance

According to the Code of Professional Conduct of the Provincial Institutes of Professional Accountants, we must co-operate and respond promptly to successor auditors. The basic overview of the process in dealing with successor auditors when an audit is discontinued is as follows:

OAG Guidance

There are two circumstances under which we may deal with communications with a successor auditor, those being when a successor auditor communicates with us for purposes of determining whether there is any reason for the successor auditor not to accept an engagement previously held by us and when a successor auditor communicates with us regarding sharing of our audit working papers for the purpose of obtaining an understanding of the client.

According to the Code of Professional Conduct, if a successor auditor communicates with a predecessor auditor for purposes of determining whether there is any reason for the successor auditor not to accept an engagement previously held by the predecessor auditor, the predecessor auditor must promptly reply. The purpose of the rule is to protect a potential successor from accepting an appointment before they have knowledge of the circumstances under which the previous accountant’s services were discontinued.

If there are no circumstances of which the successor auditor should be made aware, a simple response to this effect is all that is necessary. However, if the predecessor is aware of circumstances that should be taken into account, they should first consider the issue of confidentiality. If it appears that circumstances cannot be disclosed due to confidentiality, the response to the successor auditor should state so.

According to OAG Audit 1192, the Office may, in some specific circumstances, grant access to audit information to third parties. The engagement leader is responsible for dealing with the issue of access to audit files and for ensuring that appropriate security practices are adhered to, should access be granted. Consultation with the Access to Information and Privacy (ATIP) Coordinator and with Legal Services should occur where circumstances warrant.

Access to our files is normally provided when a successor auditor has been appointed. This is normal professional practice where the interests of the client are best served by full cooperation between predecessor and successor auditors. Before any access is granted, there should be a clear understanding, in writing, of the terms and conditions under which access is granted. Successor auditors would normally be supervised as they conduct their review work on our files.

Other than when compelled to do so by operation of law, regulatory or professional requirements or practice, or contractual obligation, access to working papers should only be given where adequate safeguards are in place to protect the Office, including the client’s consent and appropriate release letters.

We do not accept that we are under any obligation to grant third parties access to our working papers unless:

1. we are compelled to do so by law or regulatory or professional requirements or practice, or
2. we have contracted to give access.

It is important to distinguish between the client’s papers and ours; there may be circumstances where our client is compelled to give access to its papers but this does not normally compel us to give access to ours. For audit engagements, except where the terms of the engagement provide otherwise, the working papers produced in the course of gathering information and preparing a report will generally belong to us.

As set out in the Code of Professional Conduct of the Provincial Institutes of Professional Accountants, it is usually expected that there will be cooperation between preceding and succeeding auditors on provision of information. However, this does not necessarily require us to give access to our working papers. The objective of these rules is to provide a successor auditor with sufficient information about a client and the prior audit so that the successor is able to plan the current year engagement. This usually results in making available working papers that disclose the results of the audit work, but not necessarily the proprietary information about the scope and design of the process that generated those results.

Access to working papers can be allowed, subject to agreement by the former client, security clearance of the successor auditor and the receipt of appropriate acknowledgement and waiver from the successor auditor.

The major accounting firms in Canada have established a protocol concerning the extent to which access would normally be granted. More specifically, we would usually allow a successor to review working papers that contain the following information:

• factual information about the client, including analysis of financial statement line items, information relating to contingencies and commitments and a summary of proposed audit adjustments;

• information regarding the key audit issues identified during the course of the engagement and their resolution;

• information concerning the results of tests of the internal control structure and substantive testing of the accounts.

In other circumstances, access should normally not be granted. If the former client agrees, we should cooperate with any reasonable request from our successors to provide clarification of, or information on, specific accounting matters where this is necessary to resolve any particular difficulties.

Please see block below on Definition of a “reasonable request” versus “unreasonable request” for further information.

OAG Guidance

As a predecessor auditor, we should supply “reasonable” information to the successor auditor concerning the client. A “reasonable request,” as defined in the CPA Ontario Code of Professional Conduct - Guidance - Rule 303, for information related to the client, includes an opportunity for the successor to discuss with the predecessor the following:

1. the client’s accounting policies and consistency of application,

2. the work carried out by the predecessor with respect to material balances in the client’s financial statements, and

3. the financial statements groupings and account balance composition where the client does not have the information.

CAS 510 on Initial Audit Engagements – Opening Balances, also includes requirements with respect to obtaining audit evidence related to opening balances. Professional courtesy dictates that the predecessor auditor should cooperate with the successor auditor for the purpose of meeting this requirement through discussion and review of working papers.

Predecessor auditors are not usually expected to supply the following:

• copies of audit or review programs,

• working papers of an audit or review, and

• tax review documentation.

OAG Guidance

Where the engagement leader considers it appropriate to provide access to our working papers to a successor auditor, the following procedures should be implemented or considered:

• The written consent of the client shall be obtained.

• Where access is to be granted, the engagement leader should arrange for another engagement leader or director not involved with the audit to review the working papers before they are examined by the successor auditor.

• Time records, fee and budget data should be removed before the files are reviewed by the successor. If any other working papers are removed from the files, we should specify which working papers are not being made available.

• The working papers should remain under our control at all times and should not be lent to the successor auditor.

• The review should be conducted under the control of an engagement leader, director or staff member who should assist the successor to find relevant information in the file made available.

• The client’s affairs should not be discussed, unless client consent has been made.

• Copies of schedules should not normally be provided and the successor should not be permitted to take copies. We may agree to provide copies of schedules providing analysis of items in the financial statements or reconciling the financial statements with the accounting records. The extent to which copies of schedules are supplied should be discussed with, and approved by the engagement leader. Copies of schedules relating to planning or work programs, critical matters and evidence of work done should never be provided voluntarily.

• The successor auditor should be provided with controlled access to the electronic audit file which should be installed on an OAG laptop with no connection to the OAG server or Internet.

• No external media devices should be permitted from the successor auditor (CDs, floppy disks, USB keys, wireless keys, printer, etc…)

OAG Guidance

We have developed an “Acknowledgement by Predecessor Auditor” template and a “Successor Auditor Waiver Letter” template which may be helpful when communicating with a successor auditor. The templates are available on the Financial Audit INTRAnet under “Templates and Checklists.” Tailor the letters according to your particular situation. Consult with the assistant auditors general of the applicable practice and Legal Services where circumstances warrant. Both of the letters should be signed by the engagement leader where signing authority has been delegated.