Agreeing the Terms of Audit Engagements

CAS 210

Agreeing the Terms of Audit Engagements

CAS 210

Objective

An auditor should accept or continue an audit engagement when:

  • The preconditions for an audit are present; and
  • There is common understanding between the auditor, management, and those charged with governance
Requirements
Preconditions for an Audit
  • To establish whether the preconditions for an audit are present:
    1. Determine if the financial reporting framework is acceptable (i.e. GAAP); and
    2. Obtain agreement from management that it accepts and understands its responsibility:
      • For the preparation of F/S in accordance with the applicable framework
      • The fair presentation of these F/S
        • For the internal controls; and
      • To provide the auditor with
        • Access to all information which management is aware of and relevant to the preparation of the F/S
        • Additional information that the auditor may request for the audit
        • Unrestricted access to people within the organization to obtain audit evidence
Limitation on Scope Prior to Audit Engagement Acceptance

If management or the board of directors impose a limitation on the auditor’s work and if the auditor believes that such limitation will result in a disclaimer of an opinion, the auditor should not accept the engagement

Agreement on Audit Engagement Terms
  • The auditor should obtain agreement on the terms of the audit from management or those charged with governance
  • Terms of the audit engagement are written in the audit engagement letter, with the following:
    • The objective and scope of the audit of F/S
    • The responsibility of the auditor
    • The responsibility of management
    • the financial reporting framework for the presentation of the F/S (i.e. ASPE, IFRS)
    • reports to be issued by the auditor
Recurring Audits
  • the auditor doesn’t need to send a new audit engagement letter to the client unless the auditor needs to revise the terms of the audit engagement or to remind management of the terms
  • some reasons to send in a new engagement letter include:
    • a recent change in ownership, senior management
    • significant change in the nature/size of the entity’s business
    • a change in the financial reporting framework
Acceptance of a Change in the Terms of the Audit Engagement
  • the auditor should not agree to change the terms (if the client asks) of the audit if there is no reasonable justification for doing do
  • if the terms are changed a new engagement letter should be created and agreed to by the client

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