ACC311 Fundamentals of Auditing GDB Solution Spring 2013

Learning Objective:

The students are expected to learn about ATR 14 observed by the professional auditors in Pakistan.


Consider the following sections of revised Code of Ethics for Chartered Accountants issued by Institute of Chartered Accountants of Pakistan as background before attempting this GDB:

Section 210

210.1   Before accepting a new client relationship, a chartered accountant in practice shall determine whether acceptance would create any threats to compliance with the fundamental principles. Potential threats to integrity or professional behavior may be created from, for example, questionable issues associated with the client (its owners, management or activities).

210.9   A chartered accountant in practice who is asked to replace another chartered accountant in practice, or who is considering tendering for an engagement currently held by another chartered accountant in practice, shall determine whether there are any reasons, professional or otherwise, for not accepting the engagement, such as circumstances that create threats to compliance with the fundamental principles that cannot be eliminated or reduced to an acceptable level by the application of safeguards. For example, there may be a threat to professional competence and due care if a chartered accountant in practice accepts the engagement before knowing all the pertinent facts.

Section 240

240.1   When entering into negotiations regarding professional services, a chartered accountant in practice may quote whatever fee is 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.

240.2  Chartered accountants in practice shall comply with ATR-14, Minimum Hourly Charge out Rates and Minimum Fee for Audit Engagements.


The Case:

M/S Atta Ch. Chartered Accountants (ACCA) is currently rated among top five chartered accountancy firms of the country. Mr. Bakshi Khan, the company secretary of Multi Cement Company (MCC) – a company which is a market leader of cement sector, has requested ACCA to act as their auditors for the next financial year in place of their current charteredaccountancy firm M/S Haji & Sons Chartered Accounts (HSBA). Overall, ACCA is happy to get the appointment but the HSBA has not yet resigned. Mr. Bakshi has assured that MCC will not reappoint them in future provided ACCA wave off 25 percent of the first year audit fee.


Whether the above arrangement is acceptable under both legal and ethical guidelines? Explain your answer in the light of ATR-14.

Hint:    For solving this GDB, read ATR-14 mentioned in Members’ Handbook from page 11 to page 14 available on the following link:


ATR-14 (Revised-2008)



1. The audit engagements carry immense responsibility and which has

increased manifold in recent years. To meet the expectations of various

stakeholders, stringent regulatory requirements and ever increasing

demand to increase the level of due care, the members need to perform the

audit exercising very high degree of “professional competence.” Such work

is also required to be properly documented to support the opinion

expressed by the auditors.

2. The Council of theInstituteofChartered AccountantsofPakistan(ICAP)

has recently issued a notification making it mandatory, for the firms doing

audit of listed and public sector entities, to observe from 1 July 2009 ISQC

1, Quality Control for Firms that Perform Audits and Reviews of

Historical Financial Information and Other Assurance and Related

Services Engagements, issued by IFAC and has also notified, ISA 220

Quality Control for Audits of Historical Financial Information, ISA 230

Audit Documentation etc. These standards require extensive

documentation of audit procedures and recruitment of qualified staff.

Furthermore the minimum stipend rate for audit trainees have also

significantly increased. Hence, the cost to perform audit by the firms has

significantly increased to ensure that quality control procedures are

adequately complied with by the firms.

3. The Council of the ICAP periodically reviews and prescribes minimum

hourly rates, which it considers reasonable and compatible with the

increase in the cost to complete the engagements and quality of

professional standards to be observed by the practicing members of the

Institute. The current minimum chargeable rates as prescribed by the

Council of the Institute are shown below:AUDITING ATR-14 (Revised-2008)


Per man-hour

Partner 7,500

Qualified Support Staff:

Above 8 years

4 to 8 years

Below 4 years




Supervisor 2,000

Senior 1,000

Semi-Senior 750

Junior 500

4. The level of fee is to be mutually agreed between the auditor and his

client, which largely depends upon the volume of work involved and

estimated time to be incurred on the audit engagement. The Council whilst

recognizing this principle is however, of the view that there has to be a

minimum threshold of audit fee. To achieve the desired objective, the

following minimum audit fee is prescribed (which may be increased by

consent having regard to specific circumstances of an audit engagement).

Schedule of Minimum Audit Fee:

Type of entity Minimum

Fee Rupees

Listed companies

Turnover up to 500 million 250,000

Turnover over 500 million up to 1 billion 300,000

Turnover over 1 billion up to 5 billion 500,000

Turnover above 5 billion 1,000,000

Economically Significant Entities

Turnover up to 1 billion 250,000

Turnover over 1 billion up to 5 billion 400,000

Turnover above 5 billion 800,000

Medium Sized Entities 125,000

Small Sized Entities 75,000AUDITING ATR-14 (Revised-2008)


i) The terms “Economically Significant Entities” (ESE), “Medium Sized Entities”(MSE) and “Small Sized Entities” (SSE) shall have the same meaning as defined in S.R.O.859(I)/2007 dated 21 August 2007 issued by the Securities and Exchange Commission of Pakistan pursuant to Section 234 of the Companies Ordinance, 1984.

ii) Considering the practical difficulties being faced by various practicing members in the determination of audit fee, the Council has decided that the prescribed minimum audit fee shall be charged without any exception. However, in case of an existing audit client, the present audit fee shall be enhanced to the aforesaid prescribed level over a period of two years with mutual consent provided it is not less than 75% of the prescribed minimum in the first year. Nevertheless, in case of acceptance of an audit client by a practicing member for the first time the prescribed fee levels shall be strictly observed.

5. Minimum Audit Fee in Certain Circumstances For audit engagements of clients in the pre-incorporation / pre-operation stages or in case of sickness of the project or closed operations or discontinuation of business, the prescribed minimum audit fee chargeable by the practicing members shall be as under:

Listed Companies/



Minimum audit fee:


Rs.50,000 Rs. 30,000

The exception in paragraph 4(ii) above shall apply mutatis mutandis to the above paragraph 5.

6. The minimum audit fee prescribed in paragraph 4 and 5 above is exclusive of the below mentioned additional services to be rendered by a statutory auditor under the Code of Corporate Governance and for any other certifications and the professional fee for such services shall be charged separately by mutual consent.AUDITING ATR-14 (Revised-2008)

· Attend the Audit Committee Meetings of clients

· Issue a Review Report on Statement of Compliance with Best Practices of Corporate Governance

· Issue Review Report on half – yearly financial statements

· Special certification required by regulators over and above normal scope of audit

7. The minimum audit fee determined in accordance with this ATR shall not be less than the present audit fee of an existing client.

8. In case of joint audits, fee may be shared among the auditors as may be mutually agreed between them.

9. The fee may be reviewed annually to cover inflationary effects in costs.

10. The hourly rates and fee are exclusive of traveling and hotel expenses, out of pocket expenses and other incidental costs which would be reimbursable to auditors at actual.

11. In case of a religious or charitable institution or a company “not for profit”, the practicing members may undertake to do the audit on a token fee or on an honorary basis.

12. At the time of quality control review, the reviewer will ensure the compliance of this ATR.

This Directive supersedes ATR-14 (Revised) issued pursuant to the Council’s decision of 30 March, 2007 and would apply to all audit appointments made after August 31, 2008. (197th meeting of the Council held on July 25, 2008)