by Agreeing the Terms of Audit Engagement refers to the process by which the auditor and management or those charged with governance establish and document the terms under which an audit will be conducted. SA 210 – Agreeing the Terms of Audit Engagements provides guidance on this matter. The agreement ensures that both parties understand the objective and scope of the audit, responsibilities of the auditor and management, applicable financial reporting framework, and reporting arrangements before the audit begins.
1. Preconditions for an Audit
Before accepting an audit engagement, the auditor should determine whether the necessary preconditions for an audit exist. The auditor should establish whether the financial reporting framework to be used by management is acceptable and whether management acknowledges its responsibilities. Management should accept responsibility for preparing the financial statements, maintaining appropriate internal control, and providing the auditor with necessary information and access. If these fundamental conditions are absent, the auditor may not be able to accept the engagement. These preconditions provide the foundation for an effective and properly conducted audit.
2. Agreement on Audit Objective
The auditor and management should agree on the objective of the audit. The main objective is to enable the auditor to express an independent opinion on whether the financial statements are prepared, in all material respects, according to the applicable financial reporting framework. The audit provides reasonable assurance rather than absolute assurance. Clearly defining the objective helps management understand what the audit is intended to achieve and prevents unrealistic expectations regarding the auditor’s responsibilities, procedures, and ability to detect every error or fraud.
3. Determining the Scope of Audit
The terms of engagement should clearly establish the scope of the audit. The scope identifies the financial statements and reporting period covered and indicates that the audit will be conducted in accordance with applicable Standards on Auditing and legal requirements. It also establishes the nature of examination and reporting expected from the auditor. A clearly defined scope helps the auditor plan appropriate procedures and resources. It also helps management understand the boundaries of the engagement and reduces the possibility of misunderstandings about the work to be performed.
4. Auditor’s Responsibilities
The agreed terms should clearly explain the responsibilities of the auditor. The auditor is responsible for planning and performing the audit to obtain reasonable assurance that the financial statements are free from material misstatement. The auditor must exercise professional judgement and professional scepticism, obtain sufficient and appropriate audit evidence, comply with applicable Standards on Auditing, and express an independent opinion. The auditor should also communicate significant matters as required. Clearly defining these responsibilities distinguishes the auditor’s role from management’s responsibility for preparing the financial statements.
5. Management’s Responsibilities
Management must acknowledge its responsibilities for financial reporting and the audit process. These include preparing financial statements according to the applicable reporting framework, maintaining appropriate accounting records, and establishing relevant internal controls. Management is also responsible for preventing and detecting fraud and errors and providing the auditor with unrestricted access to information, documents, explanations, and relevant personnel. Agreement on these responsibilities is essential because the auditor cannot properly perform the engagement without management’s cooperation and access to necessary audit evidence.
6. Applicable Financial Reporting Framework
The auditor and management should agree on the financial reporting framework that will be used to prepare the financial statements. Depending on the entity, this may include Accounting Standards, Ind AS, or another applicable framework prescribed by law. The framework provides the criteria against which the auditor evaluates the financial statements. The auditor should determine whether the selected framework is acceptable. Agreement on the framework ensures that both parties have a common basis for preparing, examining, and reporting on the financial statements.
7. Documentation Through Engagement Letter
The agreed terms should normally be documented in an audit engagement letter or another suitable written agreement. The engagement letter records the objective and scope of the audit, responsibilities of management and auditor, applicable reporting framework, expected reporting arrangements, and other relevant terms. Written documentation provides evidence that both parties have agreed to the conditions of the engagement. It also helps prevent disputes and misunderstandings during the audit. Any significant changes in the terms should be appropriately discussed and documented.
8. Acceptance and Continuance of Engagement
The auditor should consider whether the engagement should be accepted or continued based on the agreed terms and relevant professional requirements. The auditor should evaluate independence, ethical requirements, management integrity, competence, resources, and any circumstances that could prevent proper performance. For recurring audits, the auditor should determine whether circumstances have changed sufficiently to require revision of the terms. Proper acceptance and continuance procedures help ensure that the auditor undertakes only those engagements that can be performed professionally, independently, and effectively.
