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
