1. Charging of Minimum Audit Fee for Closed Operation Client
Enquiry:
M/s PQR Textile Mills Limited was public listed company and stands de-listed from Pakistan Stock Exchange Limited on April 28, 2016. The operations of the company were remained closed from October-2008 to April-2014 and the operations were started again from May 2013 to March 2014. From April 2014 till date, the operations are still closed. In the meanwhile, we have changed the auditors of the company for the year June 30, 2016 due to ICAP QCR requirement.
According to clause 5 of revised ATR -14 of ICAP, the minimum audit fee in case of sickness of the project or closed operation or discontinuation of business, shall be restricted to Rs. 75,000 per annum.
According to clause 7 of same ATR, the minimum audit fee determined in accordance with said ATR shall not be less than the present auditor’s fee of an existing client.
There seems to be contradiction between the two clauses of the ATR. Our previous auditors were charging Rs. 150,000 as audit fee for the year ended June 30, 2015. If we ask our present auditor to charge minimum audit fee of Rs. 75,000 as closed operation segment, then they refer clause 7 of the ATR, which require not charging less audit fee than the previous year charge.
As our mill has discontinued its business operations, ICAP is requested to clarify, how the present auditor can charge minimum audit fee of Rs. 75,000 as required in clause 5 of the ATR against clause 7 of the ATR, by restricting not to charge audit fee less than the corresponding year audit fee.
Opinion:
The Committee considered your query and is of the view that the matter does not relate to Auditing Technical Release (ATR)-14 alone because it is not a simple case of minimum fees only while the said ATR-14 covers only the aspect of the minimum fees and doesn’t prescribe the maximum fees that can be charged in that category. The inquired matter relates to the fees to be charged by an incoming auditor. From the information provided, there seems to be no major change in ground realities and volume of work from previous year to current year for which the incoming auditor has reduced the fee by 50%.The Committee feels that the matter of fees at the occasion of change of auditors’ should be viewed by the incoming auditor as to whether application and adherence to the provisions of clauses (7) relating to ‘communication’ and (11) relating to ‘undercutting’ of Part I of Schedule I of the Chartered Accountants Ordinance, 1961 was made or not. The Committee would also like to refer section 240.1 of the Revised ICAP Code of Ethics for Chartered Accountants 2015 (the Code) which is reproduced below for your ready reference:
“Fees and Other Types of Remuneration
When entering into negotiations regarding professional services, a chartered accountant in practice may quote whatever fee deemed to be appropriate commensurate with the nature and service to be rendered. However, in such cases, chartered accountants in practice should be careful not to quote fee lower than that charged by the chartered accountants in practice previously carrying out the audit unless scope and quantum of work materially differs from the scope and quantum of work carried out by the previous auditor, as it could then be regarded as undercutting.” It is solely the responsibility of the incoming auditor to confirm that his appointment did not amount to undercutting.
In view of the above, the Committee is of the view that the incoming auditor cannot accept fees less than the predecessor auditor, in accordance with the requirements of clause No.7 of ATR-14 and section 240.1 of the Code, on the assumption that the quantum of work is the same.
(December 20, 2016)
2. Technical Opinion on Public Sector Bidding
Enquiry:
With respect to above mentioned subject, we need technical opinion of ICAP on following issues:-
- Whether ATR-14 of ICAP Section 240.1 and 240.2 of ICAP Code of Ethics (Revised) applies in case of bidding, by Chartered Accountant Firms, in public sector organizations.
- Our firm submitted technical and financial proposal, against advertisement in newspaper, for external audit of a public sector organization (hereinafter called the “Organization”). We required, in written, copy of latest audited financial statements from the concerned official of the organization. The organization’s official neither provided us financial statements nor replied to our letter. Keeping in view not losing the opportunity, we submitted our bid on the submission date and consequently, our firm won the bid being the lowest among all the bidders.
During our meeting the organization’s officials to start the assignment, we obtained the latest audited financial statements and found that our quoted audit fee is less than the retiring auditor’s fee. We conveyed, in written, to the organization’s official, that we are unable to accept the assignment as per requirement of ATR-14 of ICAP and Section 240.1 and 240.2 of ICAP Code of Ethics (Revised). The Organization’s official replied, in written, that our aforesaid letter is irrelevant and we have to accept the engagement on the audit fee quoted in our bid otherwise they would seek legal remedy.
Opinion:
The Code of Ethics for Chartered Accountants (the Code) and the Technical Releases issued by the Institute is applicable on all members of the Institute. We would like to refer the following paragraphs of the Code, for your guidance, which are self-explanatory:
Preface of the Code
The Code applies to all members, students, affiliates, employees of member firms and, where applicable, member firms, in all of -their professional and business activities, whether remunerated or voluntary.”
Section 240.1
When entering into negotiations regarding professional services, a chartered accountant in practice may quote whatever fee deemed to be appropriate commensurate with the nature and service to be rendered. However, in such cases, chartered accountants in practice should be careful not to quote fee lower than that charged by the chartered accountants in practice previously carrying out the audit unless scope and quantum of work materially differs from the scope and quantum of work carried out by the previous auditor, as it could then be regarded as undercutting.
Section 240.2
Chartered accountants in practice shall comply with ATR-14, Minimum Hourly Charge out Rates and Minimum Fee for Audit Engagements.
Keeping in view of the above requirements, it is suggested that at the time of participating in the tender for public sector audit, you may include a proviso that proposed audit fee (if agreed) would not be less than the audit fee of the retiring auditor as required by ICAP Code of Ethics and ATR 14.
(March 13, 2013)
3. Certain Clarifications regarding ATR – 17 (Revised 2012)
Enquiry:
Your attention is drawn towards the ATR – 17 (Revised 2012) and request you to advise which audit report should be issued in the following cases:
- In two NGOs the following scenario arises :-
The first NGO is covered under paragraph (b) (i) and receipts and disbursements account is prepared whereby both receipts and disbursements are on cash basis. However advances to employees for expenses and against salaries are recorded as advances. Further, fixed assets purchased are also capitalized as assets. The receipts and disbursements statement is prepared on the following format:
Receipts – donations xxxxxx
Misc. receipts xxxxxx
Total Receipts xxxxxx
Less: Disbursements (other than advances &
assets purchased) xxxxxx
Excess of receipts over disbursements for the year xxxxxx
Add: opening balance xxxxxx
Closing balance xxxxxx
========
Represented by:
Cash & Bank Balance
Advance to Staff
Fixed assets _______
xxxxxx
=======
In case of second NGO (having same accounting treatment as for first mentioned NGO) receipts and disbursement statement is prepared as mentioned above and the lower part ‘represented by’ is not prepared. Further, a separate balance sheet is prepared where closing balance is kept on ‘capital and liabilities’ side and assets on the other side.
Question 1: You are requested to advise which audit reports should be issued for above two NGOs. Apparently, ATR- 17 (revised – 2012) do not address such situations?
A third NGO is covered under paragraph (b) (iii) of the ATR – 17. In this NGO fixed assets and non- expandable items purchased are charged to expenditure under donor’s requirements whereas as all other assets and liabilities are recognized in the balance sheet.
Question 2: You are requested to advise which audit report should be issued under ATR – 17 (revised – 2012) for third NGO?
2. Additionally I wish to draw your attention towards specimen audit report covered under paragraph (b) (iii) of the said ATR wherein it is mentioned that “We have audited the annexed balance sheet of the ……. As at …… and the related income and expenditure account…… “
The specimen audit report does not suggest an opinion on the balance sheet. In the opinion paragraph it is stated” …… In our opinion the financial statements present fairly, in all material respects, the cash receipts and expenditure……”
Question 3:
Please advise whether one can refrain from giving an opinion on any components of financial statements after mentioning that he has audited that component?
Question 4:
Further, would it be appropriate to call the “receipts and expenditure and balance sheet” (having all assets and liabilities except for fixed assets) as “financial Statements” of the third NGO mentioned in paragraph 1 of this query?
Opinion:
The Committee would like to emphasize that financial statements may be prepared in accordance with any other comprehensive basis of accounting (or accounting framework), apart from three examples illustrated in para (b) of ATR-17. The basis of accounting should be adequately disclosed in the note for the basis of preparation of financial statements. The Committee examined your enquiry and is of the opinion that:
Question 1
The audit report formats provided in ATR-17 are for guidance purposes. In cases where a reporting framework other than those illustrated in ATR-17, is used, or specific donor requirements exist, the prescribed formats of ATR-17 may be amended by the practitioners accordingly.
Question 2
The auditor should exercise his professional judgment to decide the auditor’s report format to be issued under ATR -17. The reporting format may be amended in accordance with the basis of preparation used.
Question 3
The audit report covered under paragraph (b) (iii) of ATR-17 states that “financial statements include balance sheet and the related income and expenditure account and cash flow statement together with the notes”. Therefore, it is not necessary to mention each component of financial statements separately in the opinion paragraph.
Further, the auditor cannot refrain from giving an audit opinion on any component of financial statements, after mentioning the fact that he has audited that component.
Question 4
The Committee would like to refer the definition of Financial Statements as defined in Glossary of Terms in International Standards on Auditing (ISA):A structured representation of historical financial information, including related notes, intended to communicate an entity’s economic resources or obligations at a point in time or the changes therein for a period of time in accordance with a financial reporting framework. The related notes ordinarily comprise a summary of significant accounting policies and other explanatory information. The term “financial statements” ordinarily refers to a complete set of financial statements as determined by the requirements of the applicable financial reporting framework, but it can also refer to a single financial statement. Based on above, the Committee is of the view that the receipts and expenditure account and balance sheet together may be called ‘Financial Statements’.
(November 06, 2012)
4. Audit Fee of Statutory Auditors
Enquiry:
We would like to submit that our statutory auditors while offering their services for re-appointment for the year ending September 30, 2010 had requested in their consent letter dated December 14, 2009 that their audit fee may be fixed with mutual agreement in accordance with the guidelines given in ATR-14 of ICAP.
In consultation and mutual agreement with the auditors, their audit fee for the year ending September 30, 2010 was fixed in accordance with the guideline given in ATR-14 based on our turnover for the year ended September 30, 2009 and the Board of Directors recommended for re-appointment of the auditors on the agreed fee by the shareholders in the AGM. The auditors were re-appointed and the recommended fee for the year ending September 30, 2010 was approved by the shareholders in our AGM held on January 30, 2010 including the extra fee for CCG and limited scope review of Half Yearly Accounts.
The turnover of our company for the year ending September 30, 2010 (for which the auditors were appointed) has increased due to rise of sugar price in the market. The process of audit is underway but the auditors are insisting to charge increased audit fee for the year ending September 30, 2010 based on the turn over for the year whereas the audit fee for the year is already approved by shareholders in the AGM based on the turnover of last year with mutual consent of Auditors.
Your guidance is needed whether the auditors are justified in insisting to charge increased audit fee than that agreed by them and approved by shareholders for the year ended September 30, 2010 based on the turnover of the year, or they may request to increase their audit fee for the next year i.e. September 30, 2011, which will be mutually agreed and put up before our shareholders for their approval in the forthcoming AGM scheduled to be held in January, 2011.
For ready reference the Committee likes to draw your attention to the following clauses of section 252 of the Companies Ordinance 1984:
252. Appointment and remuneration of auditors.
(1) Every company shall at each annual general meeting appoint an auditor or auditors to hold office from the conclusion of that meeting until the conclusion of the next annual general meeting:
(8)The remuneration of the auditors of a company shall be fixed,—
(a) in the case of an auditor appointed by the directors or by the Commission, as the case may be; and
(b) in all other cases, by the company in general meeting or in such manner as the general meeting may determine.
Based on above, the Committee is of the opinion that the Company is required to pay the audit fee fixed or approved in the AGM keeping in view the requirements of audit fee referred to in ATR 14.
(April 15, 2011)
5. Audit Fee of Fund in ATR – 14
Enquiry:
Our client is an Endowment Fund and as per the criterion laid down in ATR-14, it falls into the category of “Medium Size Entity”, though the volume of transactions is small.
The main object of the Fund is to provide perpetual source of income to supplement the income of the parent organization which is an educational institution running on commercial lines but also receives grants from the government regularly.Guidance is required as to whether the fee for the audit of the Fund should be charged as per paragraph 11 or paragraph 4 of the subject ATR.
Opinion:
The Committee has examined your enquiry and is of the opinion that ATR -14 appears to apply to the said organization provided that it is neither charitable institution nor a ‘not for profit organization’.
(July 8, 2010)
6. Clarification regarding Half Yearly Review
Enquiry:
We conducted the audit of a listed company for the year ended June 30, 2008, and the AGM, during which the above said report and Financial statements for the year ended June 30, 2008, was held in May 2009. During this AGM the company duly appointed another firm of chartered accountants in place of our firm, which means that our firm held the office of external auditor until the conclusion of AGM of the company held in May 2009. Despite our reminders to the company for the review of half yearly accounts for the period ended December 30, 2008, the company did not make any arrangements for the review and hence we were unable to conduct the half yearly review for the said period. Now the company has requested us to conduct the half yearly review for the period ended December 31, 2008.
Considering the scenario given above, following are our queries:-
- Whether or not we can conduct the review of half-yearly financial statements for the period ended December 31, 2008, in current date.
- Under the given scenario what would be the possible course of action for the company to fulfill the SECP requirement to submit the half yearly review report for the period ended December 31, 2008.
Opinion:
The Committee wishes to draw your attention towards clause 4.4 of the ATR – 11:
“Since the auditors are appointed for a period up to the conclusion of the next annual general meeting, they can audit more than one year’s accounts during their period in the office. However such situation can only arise if a company fails to prepare and present the accounts at the annual general meeting as required under section 230 of the Ordinance……“
In view of above, the Committee is of the opinion that only the current auditor can conduct the limited review of half-yearly financial statements for the period ended December 31, 2008 in current date. Retiring auditor cannot conduct the limited review of the previous period because section 252(1) of the Companies Ordinance 1984 provides that an auditor is appointed to hold an office from the conclusion of that annual general meeting until the conclusion of the next annual general meeting. The auditors appointed in the Annual General Meeting held on May 2009 are current auditors of the company; therefore, they can conduct limited review/audit of financial statements of the company for the previous period(s)/year(s) in addition to limited review/audit for the current period/year.With regard to your second enquiry, please refer section 245 of the Companies Ordinance 1984 which deals with the issue.
(February 2010)
7. Implementation of ATR-14
Enquiry:
Please refer to ATR-14 concerning minimum audit fees to be charged from companies.
Case 1
We would seek your guidance for determination of minimum audit fee of a private limited company for the year ended June 30, 2003, with following financial parameters as at the year-end:
Paid-up share capital Rs. 1,000
Accumulated Retained earnings carried forward Rs.13,562,312
Fixed Assets (Accumulated cost) Rs. 5,731,443
Turnover Rs.30,401,057
Profit/(Loss) for the year before tax (Rs.4,054,688)
Net Profit/(Loss) for the year after tax (Rs.4,206,693)
Further, we would seek clarification regarding the following two excerpts of the subject ATR:
1. “……..the following parameters…. shall govern the determination of a minimum prescribed audit fee based on the applicability of any two parameters within a category. In case of applicability of a combination of parameters in a specific situation, the highest prescribed minimum audit fee shall be applicable.”
2. “…….. in case where less than two of the aforesaid parameters are attracted for whatever reason……………….. the prescribed minimum audit fee chargeable by the practising members shall be (Rs. 25,000/- for listed companies and Rs.15,000/- for other companies).”
The clarification is mainly required in the following respects:
Case 2
- We have been approached by a number of companies that are neither sick nor have they discontinued their operations, but they fall in the category A as per the ATR. These companies maintain that they fall under para 2 as above, and audit fee should be accordingly Rs.25,000 or Rs.15,000/- as the case may be.
Case 3
- In a situation where a company falls in category D for one parameter whereas in category A for two parameter, what audit fee shall be charged by auditors.
We would request a timely response on the above so that confusion over implementation of the ATR is settled.
Opinion:
The appropriate Committee of the Institute has examined the three cases cited by you and in its opinion the fees to be charged should be as follows:-
Case 1
In this case the total of accumulated retained earnings and paid up capital is Rs.13,563,312/- and turnover Rs.30,401,057/-. As such this company falls in category “B” and being a private limited company the minimum fee to be charged should be Rs.50,000/-
Case 2
It has been mentioned that the companies are neither sick nor they have discontinued their operations and they fall in the category “A” as per the ATR but no reason for their categorization under para 4 of the ATR-14 has been mentioned. As they fall in category “A” the minimum fee would be Rs.60,000/- or Rs.40,000/- as the case may be.
Case 3
In this case as the company falls in category “D”, the minimum audit fee would be Rs.125,000/- or Rs.100,000 as the case may be.
(October 2, 2004)