ISA (UK) 210: Agreeing the terms of an Audit Engagement

Before an auditor accepts an audit engagement, he is responsible for agreeing on certain engagement terms with the management, and where required, with those charged with governance. ISA 210 requires the auditor to accept an audit engagement only when the following bases for an audit has been established:

1.    Preconditions for the audit are present.

2.    The auditor and management conform to a common understanding of the terms of the audit engagement.

Agreeing to the terms of an audit engagement is particularly important as it enables both the parties i.e. the auditor and the management to understand their respective responsibilities towards the conduct of an audit.

Preconditions for an audit engagement

The preconditions for an audit entail the following.

1.    Adoption of an acceptable financial reporting framework (FRF) by the management for the preparation of the entity's financial statements.

2.    Management's acceptance of its responsibility for the preparation of financial statements in accordance with the applicable FRF, implementation of adequate internal controls, and provision of access to the auditor to all the required information.

The acceptability of the FRF adopted by the entity varies with the nature of the entity, the nature, and purpose of the financial statements, and the requirements of the applicable law and regulations.

Agreement on the terms of an audit engagement

An auditor shall ensure that the management adequately understands and agrees to the terms of an audit engagement. These terms primarily include the scope and objective of the audit, the responsibilities of the auditor and the management, reference to the applicable FRF, the form and content of the audit report, and other relevant information. Once agreed, these terms are to be set out in the audit engagement letter.

Implications for Recurring Audits

The auditor is not required to send a new engagement letter for recurring audit engagements. However, certain circumstances may necessitate the revision or reiteration of the existing audit terms. These might include a significant change in the senior management or ownership of the entity, misapprehension of the previously laid out terms, change in the reporting requirements, etc.

Practice

It is only if the above-stated criteria are met that an auditor should accept and continue an audit engagement. In case the preconditions are not met, the auditor must take up the matter with those charged with governance. An auditor might often be required to change the terms of the engagement once the audit engagement has been accepted. However, such changes shall not be accepted until there is a reasonable justification to do so. For example, the conversion of a public entity into a private entity exempt from the requirements of audit of its financial statements. An auditor must issue a new engagement letter in case of a change in audit engagement terms.

References:

https://www.frc.org.uk/getattachment/b245bc7f-453f-49b8-ad9b-2ce992f6ca67/ISA-(UK)-210_Revised-June-2016_Updated-July-2017.pdf