1. 44 SEPTEMBER 2012 45SEPTEMBER 2012
BUSINESS
O
n any given day, the Technical Services team at
NZICA receives a wide range of queries to its inbox
(technical@nzica.com). Every now and then, there
is an exceptionally good question, which is that bit
more challenging and requires more research. These
are often the questions which are widely applicable,
and therefore likely to be of interest to many members.
The team recently received a request for guidance as to what steps
to take to resign from an audit after acceptance of the engagement,
but before completion of the audit work, and of any Company
Office requirements that need to be adhered to.
In this article we take a look at the technical basis that warrants
auditor resignation and the process auditors must follow if they feel
they must resign after an audit engagement has commenced.
PROFESSIONAL STANDARDS
The International Standards on Auditing (ISAs) use the term
“withdraw” as opposed to resign.
Withdrawing as auditor is not a straightforward process, and
there must be genuine grounds for the withdrawal taking place. Due
to the variety of the circumstances that may arise, it is not possible
to describe definitively when withdrawal from an engagement is
appropriate.
Factors that affect the auditor’s conclusion include the
Auditor
resignation
What do you need to know
to resign from an audit
engagement before
completion?
BY JASON STINCHCOMBE CA AND ZOWIE MURRAY CA
The auditor
may
consider it
appropriate
to seek legal
advice when
deciding
whether to
withdraw
from an
engagementimplication of the involvement of a
member of management or those charged
with governance in any misconduct. The
corollary of this is the reduced reliability
of management representations, which may
also in turn affect the auditor’s ability to
continue their association with the entity.
The auditor may consider it appropriate
to seek legal advice when deciding whether
to withdraw from an engagement and
in determining an appropriate course of
action.
The ISAs, NZICAs Code of Ethics and
the External Reporting Board’s (XRB)
Professional Engagement Standards note a
number of circumstances when withdrawal
from an audit engagement may be
appropriate. These include the following:
• Threats to audit independence become
known only after commencement of the
engagement, and they are unable to be
reduced to an acceptable level through the
application of appropriate and effective
safeguards.
• The auditor is unable to obtain sufficient
appropriate audit evidence, and the
possible effects on the financial statements
of undetected misstatements could be
both material and pervasive.
• The auditor is unable to agree to a change
of the terms of the audit engagement, that
effectively limits the scope of the audit
subsequent to accepting the engagement.
• As a result of a misstatement resulting
from fraud or suspected fraud, the auditor
encounters exceptional circumstances
that bring into question the auditor’s
ability to continue performing the audit.
This would generally be because:
- if an occurrence was identified, those
charged with governance not taking
appropriate remedial action; or
- a significant risk of materiality and
pervasive fraud is considered to exist.
• Management or those charged with
governance do not take corrective action
that the auditor considers appropriate for
non-compliance with laws and regulations
• if the two-way communication between
the auditor and those charged with
governance is not adequate and the
situation cannot be resolved.
• Concerns about the competence, integrity
or ethical values of those charged with
governance, or about their commitment
to or enforcement of these, emerge
during the course of the audit which
cause the auditor to conclude that the
risk of misrepresentation in the financial
statements is such that an audit cannot be
conducted.
• Revision of the other information
(financial and non-financial) included in
the document containing the financial
statements and audit report thereon
is necessary, and those charged with
governance refuse to make the revision.
Before withdrawing, however, the auditor
needs to discuss with the appropriate
level of management and those charged
with governance their withdrawal from
the engagement and the reasons for the
withdrawal.
The auditor must also determine whether
there is a professional or legal requirement to
report to the person(s) who made the audit
appointment or, in some cases, to regulatory
authorities, the auditor’s withdrawal from
the engagement and the reasons for the
withdrawal.
SCOPE LIMITATIONS
Many situations that would give rise to
considering withdrawal will be limitations
on the scope of the audit. There are two
essential considerations to be made prior to
making a decision to withdraw.
The first is whether the scale of the issue
is sufficient to warrant withdrawal. The
limitation’s quantum or nature would need
to be pervasive, a higher threshold than a
material issue. To be pervasive:
• issues must not be confined to specific
elements, accounts or items of the financial
statements; or
• the issue must involve a substantial
proportion of the financial statements; or
• in relation to disclosures, the issue must
be fundamental to users’ understanding of
the financial statements.
Clear communication with the governing
body as to the severity of an issue is
important.
The second consideration is whether
withdrawal is practical and possible in terms
of the laws and regulations – otherwise the
audit should be completed and a disclaimed
report issued.
The “practical” consideration required
under the ISAs is whether, given the stage
of completion of the audit, it is practical to
withdraw or whether it is more appropriate
to complete the audit with a disclaimer. This
is left to the auditor’s own judgement.
The “possible” consideration is whether
the laws or regulations enable the auditor to
resign without completing the audit. Law or
regulation may prohibit this.
Whilst not common in New Zealand, an
example of this situation is Contributory
Mortgage schemes. The Securities Act
(Contributory Mortgage) Regulations 1988
only removes responsibilities from the
existing auditor once a successor auditor
has consented to being the auditor of such
a scheme.
Another example is found in the public
sector. The Public Audit Act 2001 reformed
and restated the law relating to the audit of
public sector organisations. The Auditor-

2. 44 SEPTEMBER 2012 45SEPTEMBER 2012
BUSINESS
O
n any given day, the Technical Services team at
NZICA receives a wide range of queries to its inbox
(technical@nzica.com). Every now and then, there
is an exceptionally good question, which is that bit
more challenging and requires more research. These
are often the questions which are widely applicable,
and therefore likely to be of interest to many members.
The team recently received a request for guidance as to what steps
to take to resign from an audit after acceptance of the engagement,
but before completion of the audit work, and of any Company
Office requirements that need to be adhered to.
In this article we take a look at the technical basis that warrants
auditor resignation and the process auditors must follow if they feel
they must resign after an audit engagement has commenced.
PROFESSIONAL STANDARDS
The International Standards on Auditing (ISAs) use the term
“withdraw” as opposed to resign.
Withdrawing as auditor is not a straightforward process, and
there must be genuine grounds for the withdrawal taking place. Due
to the variety of the circumstances that may arise, it is not possible
to describe definitively when withdrawal from an engagement is
appropriate.
Factors that affect the auditor’s conclusion include the
Auditor
resignation
What do you need to know
to resign from an audit
engagement before
completion?
BY JASON STINCHCOMBE CA AND ZOWIE MURRAY CA
The auditor
may
consider it
appropriate
to seek legal
advice when
deciding
whether to
withdraw
from an
engagementimplication of the involvement of a
member of management or those charged
with governance in any misconduct. The
corollary of this is the reduced reliability
of management representations, which may
also in turn affect the auditor’s ability to
continue their association with the entity.
The auditor may consider it appropriate
to seek legal advice when deciding whether
to withdraw from an engagement and
in determining an appropriate course of
action.
The ISAs, NZICAs Code of Ethics and
the External Reporting Board’s (XRB)
Professional Engagement Standards note a
number of circumstances when withdrawal
from an audit engagement may be
appropriate. These include the following:
• Threats to audit independence become
known only after commencement of the
engagement, and they are unable to be
reduced to an acceptable level through the
application of appropriate and effective
safeguards.
• The auditor is unable to obtain sufficient
appropriate audit evidence, and the
possible effects on the financial statements
of undetected misstatements could be
both material and pervasive.
• The auditor is unable to agree to a change
of the terms of the audit engagement, that
effectively limits the scope of the audit
subsequent to accepting the engagement.
• As a result of a misstatement resulting
from fraud or suspected fraud, the auditor
encounters exceptional circumstances
that bring into question the auditor’s
ability to continue performing the audit.
This would generally be because:
- if an occurrence was identified, those
charged with governance not taking
appropriate remedial action; or
- a significant risk of materiality and
pervasive fraud is considered to exist.
• Management or those charged with
governance do not take corrective action
that the auditor considers appropriate for
non-compliance with laws and regulations
• if the two-way communication between
the auditor and those charged with
governance is not adequate and the
situation cannot be resolved.
• Concerns about the competence, integrity
or ethical values of those charged with
governance, or about their commitment
to or enforcement of these, emerge
during the course of the audit which
cause the auditor to conclude that the
risk of misrepresentation in the financial
statements is such that an audit cannot be
conducted.
• Revision of the other information
(financial and non-financial) included in
the document containing the financial
statements and audit report thereon
is necessary, and those charged with
governance refuse to make the revision.
Before withdrawing, however, the auditor
needs to discuss with the appropriate
level of management and those charged
with governance their withdrawal from
the engagement and the reasons for the
withdrawal.
The auditor must also determine whether
there is a professional or legal requirement to
report to the person(s) who made the audit
appointment or, in some cases, to regulatory
authorities, the auditor’s withdrawal from
the engagement and the reasons for the
withdrawal.
SCOPE LIMITATIONS
Many situations that would give rise to
considering withdrawal will be limitations
on the scope of the audit. There are two
essential considerations to be made prior to
making a decision to withdraw.
The first is whether the scale of the issue
is sufficient to warrant withdrawal. The
limitation’s quantum or nature would need
to be pervasive, a higher threshold than a
material issue. To be pervasive:
• issues must not be confined to specific
elements, accounts or items of the financial
statements; or
• the issue must involve a substantial
proportion of the financial statements; or
• in relation to disclosures, the issue must
be fundamental to users’ understanding of
the financial statements.
Clear communication with the governing
body as to the severity of an issue is
important.
The second consideration is whether
withdrawal is practical and possible in terms
of the laws and regulations – otherwise the
audit should be completed and a disclaimed
report issued.
The “practical” consideration required
under the ISAs is whether, given the stage
of completion of the audit, it is practical to
withdraw or whether it is more appropriate
to complete the audit with a disclaimer. This
is left to the auditor’s own judgement.
The “possible” consideration is whether
the laws or regulations enable the auditor to
resign without completing the audit. Law or
regulation may prohibit this.
Whilst not common in New Zealand, an
example of this situation is Contributory
Mortgage schemes. The Securities Act
(Contributory Mortgage) Regulations 1988
only removes responsibilities from the
existing auditor once a successor auditor
has consented to being the auditor of such
a scheme.
Another example is found in the public
sector. The Public Audit Act 2001 reformed
and restated the law relating to the audit of
public sector organisations. The Auditor-

3. 46 SEPTEMBER 2012 47SEPTEMBER 2012
BUSINESS
General is the auditor of every public entity;
therefore the option of withdrawal is not
available.
Regardless of the decision ultimately made,
where limitations are imposed on the scope
of the auditor’s work, clear documentation
should be created to outline the basis for the
auditor’s actions.
THE COMPANIES ACT
There is a specific process which must be
followed upon auditor resignation from any
company audit (ie all reporting entities). This
is governed by sections 196 and 203 of the
Companies Act 1993. These are procedures
that the auditor and then the company must
follow:
1.The auditor must give written notice
to the board of the company; this may
also include a written statement of the
auditor's reasons for resigning.
2.The company must, as soon as practicable,
notify its shareholders of the auditor’s
resignation, plus the auditor’s reasons for
resignation (if provided).
3.The board of a company may fill any
casual vacancy in the office of auditor.
4.If a casual vacancy in the office of auditor
is not filled within one month of the
vacancy occurring, the Registrar may
appoint an auditor.
5.A company must, within five working days
of the power becoming exercisable, give
written notice to the Registrar of the fact
that the Registrar is entitled to appoint an
auditor.
In addition to providing a written
statement, an auditor is entitled to explain
at a shareholders’ meeting the reasons for
their resignation. They are also entitled to
be paid by the company reasonable fees and
expenses for making the representations to
shareholders. If a company fails to comply
with the process set out above, every director
of the company commits an offence and is
liable on conviction to a penalty of up to
$10,000.
SUCCESSOR AUDITORS
After withdrawing from an audit
engagement the existing auditor will be
contacted by the successor auditor who
will request professional clearance to accept
the appointment. In a situation where the
auditor has resigned from the client, the
standard letter of professional clearance will
be unlikely to be appropriate!
The existing auditor will need to request
written permission from the client to discuss
the affairs freely with the proposed successor.
After this has been obtained, the wording of
the communication with successor auditors
will need to be carefully considered in light of
the basis for the resignation.
SUMMARY
This article makes it evident that withdrawing
from an audit engagement is far from being
simple and is not an easy decision for an
auditor to make, and certainly not one that
should be made lightly. There are many
elements that must be considered; the
practicality of withdrawing from the audit
may depend on the stage of completion of the
engagement at the time; whether the laws or
regulations allow resignation; and the auditor
may require legal advice prior to making the
decision of whether to resign or not.
Two of the most essential actions are
communication and documentation.
The auditor must have open two-way
communication with the client so there is the
opportunity for the issues to be understood
and resolved, or for the scope limitation to
be reduced. In practice, the quality of this
communication is vital given that discussion
of potential resignation can be a difficult
situation for all involved.
The events leading up to a decision to
withdraw from an audit engagement need to
be fully documented, detailing the rationale
behind any significant judgements made.
The situation may even be avoided
altogether if the auditor has robust
acceptance and continuance procedures
which are able to identify the potential
for such issues to arise, then the auditor
would simply not engage. However even
with robust pre-engagement procedures,
unforeseen issues develop over the course of
the audit – and resigning as auditor really is
the last resort.
Jason Stinchcombe CA is an Audit Services
Manager at Hayes Knight, and Zowie Murray
CA is the Audit and Assurance Specialist on the
NZICA Technical Services Team.
The auditor
must have
open two-
way commu-
nication with
the client so
there is the
opportunity
for the issues
to be under-
stood and
resolved
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