Agreeing the Terms of Audit Engagements - 210

1. Introduction: Scope: a. agreeing terms of engagement with management and where appropriate, TCWG b. establishing certain preconditions for management (auditors preconditions are in ISA 220) 2. OBJECTIVE To accept or continue an audit engagement only when the basis upon which it is to be performed has been agreed, through: (a) Establishing whether the preconditions for an audit are present; and (b) Confirming that there is a common understanding between the auditor and client 3. Definitions:

Preconditions: Use of an acceptable reporting framework and agreement on premise 4. 4.1 Requirements Preconditions for an Audit

To establish that preconditions are present, auditor shall: Determine whether reporting framework is acceptable Its an appropriate basis for the preparation of the financial statements and suitable criteria for auditing the financial statements Factors to determine suitability: o Nature of the entity o Purpose of FS o Nature of FS o Law of regulations requirements FS prepared in accordance with a framework designed to meet the common financial information needs of a wide range o users are referred to as general purpose financial statements and FS prepared under a framework for needs of specific users are special purpose financial statements. If after acceptance, you find out framework isnt good (other than frameworks under law), management changes framework and you agree new terms. General purpose frameworks: At present, there is no objective and authoritative basis that has been generally recognized globally for judging the acceptability of general purpose frameworks. However: IFRSs by IASB, IPSAS or as set by standards setting organization in a particular jurisdiction. These are often recognized by the laws too. Frameworks prescribed by law or regulation: In the absence of indications to the contrary, such a financial reporting framework is presumed to be acceptable for general purpose financial statements. Jurisdictions that do not have standards setting organizations or prescribed financial reporting frameworks: Management has to identify. (Appendix 2) Attributes of an acceptable framework: Relevance, completeness, reliability, Neutrality, Understandability

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Agreeing the Terms of Audit Engagements - 210

Obtain agreement of management that it acknowledges responsibilities (as per the premise) (Premise: Prepare FS, Internal Control, Provide auditor info and access) Management has to provide Written Representation that they have fulfilled their responsibilities so its appropriate to tell them this via engagement letter. If management doest agree to it, dont accept engagement, unless bound by law. Preparing FS included presentation. Management maintains internal controls to obtain reasonable assurance that financial reporting objective will be met and audit does not provide a substitute to that. Accounting books, records and system is part of internal control.

Limitation on Scope Prior to Audit Engagement Acceptance If it will result in disclaimer of opinion, do not accept such a limited engagement as an audit engagement, unless required by law or regulation to do so. Other Factors Affecting Audit Engagement Acceptance - Framework - Premise 4.2 Agreement on Audit Engagement Terms

Shall agree the terms of the audit engagement with management or TCWG, as appropriate. Agreed terms of the audit engagement shall be recorded in an audit engagement letter or other suitable form of written agreement and shall include: (a) The objective and scope of the audit of the financial statements; (b) The responsibilities of the auditor; (c) The responsibilities of management; (d) Identification of the applicable financial reporting framework for the preparation of the FS; and (e) Reference to the expected form and content of any reports If such terms are defined by law, detailed agreement may not be recorded except that law applies and management accepts the premise. In addition to the above, engagement letter may include: 1. 2. 3. 4. 5. 6. Elaboration of the scope of the audit The form of any other communication T inherent limitations of an audit an unavoidable risk of undetected misstatements. Arrangements regarding the planning and performance of the audit The expectation of written representations The agreement of management to make available to the auditor draft financial statements and any accompanying other information in time.

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Agreeing the Terms of Audit Engagements - 210

7. The agreement of management to inform the auditor of facts that may affect the financial statements. 8. Basis of fees and any billing arrangements. 9. A request for acknowledgement of receipt to agree to the terms of the engagement outlined therein. When relevant, following also: 1. 2. 3. 4. 5. Involvement of other auditors and experts Involvement of internal auditor and client staff Arrangements to be made with predecessor auditor Restriction on responsibility, if applicable Reference to any further agreements

Audit of Components: Where auditor of parent company is auditor of subsidiary, division or branch as well, then separate EL to be sent will depend on: 1. Appointing authority 2. Separate report to be issued 3. Legal requirements 4. Degree of ownership by parent 5. Degree of independence of components management 4.3 Shall Recurring Audits assess whether: Circumstances require the terms to be revised There is need to remind the client of existing terms

New engagement letter to be sent will depend upon: Misunderstanding of scope and objective by client Revised or special terms Recent change of senior management Significant change in ownership Significant change in nature and size of business Legal or regulatory requirements Change in reporting framework Change in reporting requirements 4.4 Acceptance of a Change in the Terms of the Audit Engagement

The auditor shall not agree to a change in the terms of the audit engagement where there is no reasonable justification for doing so. Request for change may arise from: Change in circumstances Misunderstanding Restriction on scope Circumstances change: could be reasonable Information incomplete, incorrect or unsatisfactory: may not be considered reasonable

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Agreeing the Terms of Audit Engagements - 210

Request to Change to a Review or a Related Service Other than above, consider legal and contractual implications If auditor concludes that there is a reasonable justification of changing the terms then report will not include reference to: Original engagement Procedures that may have been performed in original engagement If auditor is unable to change the terms and is not permitted to continue then: He should withdraw and Consider whether there is obligation to report the circumstances to other parties. 4.5 Additional Considerations in Engagement Acceptance

Financial Reporting Standards Supplemented by Law or Regulation If law and reporting standards conflict exist, the auditor shall discuss with management the nature of the additional requirements and shall agree whether: (a) The additional requirements can be met through additional disclosures in the financial statements; or (b) The description of the applicable financial reporting framework in the financial statements can be amended accordingly. If neither of the above actions is possible, the auditor shall determine whether it will be necessary to modify the auditors opinion in accordance with ISA Financial Reporting Framework Prescribed by Law or RegulationOther Matters Affecting Acceptance Reporting framework, otherwise unacceptable but prescribed by law, following condition are to be met: Management agrees to provide additional disclosures It is recognized in the terms of the audit engagement that: o The auditors report will incorporate an Emphasis of Matter paragraph o Unless required by law avoid the phrases present fairly, in all material respects, or give a true and fair view If the above conditions are not present: Consider effect on report Include reference of this in engagement letter Auditors Report Prescribed by Law or Regulation If Law prescribes report significantly different from ISAs, evaluate: Whether it would mislead user as to the level of assurance Can additional explanation mitigate possible misunderstanding Cant mitigate: dont accept. Have to accept: dont show compliance with ISAs [See sample engagement letter in Annexure A to the ISA 210]

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