Now that the Crest Outfitters executives have decided to obtain reasonable assurance on their financial report, Ben (the CFO) advises that they should obtain formal tenders from a range of audit firms.

For the Crest Outfitters tender, Felix will put forward the following staff members for the engagement.

• Felix Wong, audit partner: as the founding partner of the practice, Felix likes to take on the higher profile audit and assurance clients.

• Tia Hallafi, audit manager: she has significant experience in auditing manufacturing clients and worked with publicly listed companies as a Big-4 auditor before moving to AuditTek.

• Rory James, audit senior: he has worked for AuditTek since graduating with his accounting degree from university. Rory has recently completed his professional accounting qualification.

• Leigh Van, audit cadet: she is working part-time at AuditTek while studying at university. Leigh has six months left of her university studies and speaks Cantonese, Mandarin and Vietnamese.

Tia has been tasked with preparing the formal tender and must outline why AuditTek is the most suitable auditor for Crest Outfitters. If they win the engagement, Crest Outfitters will be one of AuditTek’s largest clients, joining six others of similar size.

Tia needs to provide an accurate budget for the tender, otherwise there is a risk of charging the client too little and making a loss. If AuditTek proposes a budget that is too high, it may lose the engagement to another audit firm that charges less. It is a delicate task to try and predict how much audit effort and work is required for an audit. There is a risk of exposure to litigation and lawsuits if the audit team does not complete the audit in accordance with the Australian Auditing Standards and provides the client with an incorrect audit opinion. 

How does an auditor know how much audit work and effort may be needed on an audit? They need to understand the client well enough to be able to identify areas that are more likely to contain misstatements due to error or fraud. This is because these areas will require more audit effort to investigate and detect any such misstatements. To gather this understanding, Tia will need to conduct research based on publicly available information about Crest Outfitters and also review the unaudited previous financial statements.

Tia is concerned about the climate emissions assurance component of the engagement. Rory has completed one assignment in this area when he was at his previous employer before he graduated, but no one else on the team has completed assurance over climate emissions. Felix sees this as a potential new service offering for AuditTek and would like to bring an expert onto the team. Tia has been tasked with investigating the sorts of skills an assurance expert for this area may need.

In preparing the tender, Tia must conduct research into AuditTek’s audit team members’ relation-ships with Crest  Outfitters to ensure that there are no conflicts with the independence requirements of APES 110 Code of Ethics for Professional Accountants (including Independence Standards).

Tia documents the following information.

• Felix did provide free advice to Anjani and Peter almost a decade ago when they were trying to fund the manufacture of the One Camera Strap product. However, Crest Outfitters was not a client of AuditTek.

• A previous employee of AuditTek from the bookkeeping division, Songyuan Lu, now works at Crest Outfitters as their main accountant. She did not work in the audit division at AuditTek and none of the current auditors have ever worked with Songyuan.

• Crest Outfitters is not a client of AuditTek as far as Tia can find in the records for the audit, tax and bookkeeping divisions.

• Felix knows Anjani and Peter through the photography community; however, they do not meet or socialise in any other circumstances.

Required

(a) You are Tia — prepare your report for Felix about whether AuditTek will be able to provide assurance services to Crest Outfitters. Will AuditTek meet all the requirements set out in APES 110? Will the audit team be able to carry out their responsibilities adequately?

(b) Are there any independence concerns? Does AuditTek need to implement any safeguards?

(c) Tia asked Rory to prepare the engagement letter for the client. Rory used the sample letter in the Appendix of ASA 210 (ISA 210) Agreeing the Terms of Audit Engagements as the base for his draft. Ensure the engagement letter complies with ASA 210 (ISA 210) for an audit engagement for a year ending 30 June 2020.