Overview

During this phase of audit, the auditor shall undertake the following preliminary engagement activities:

Performing procedures regarding the acceptance of the client relationship and the specific audit
engagement;

Including communicating with the predecessor auditor, if applicable; and

Agreeing the basis of audit engagement, such as:

Establishing preconditions for an audit; and

Agreeing the terms of the engagement.

Client Acceptance and Continuance

The auditor shall only undertake or continue audit engagement where the auditor:

is competent to perform the engagement and has the capabilities, time and resources to do so;

complies with relevant ethical requirements; and

considers the integrity of the client.

Communication with Predecessor Auditor

For prospective clients that have previously been audited by another CPA firm, the new (successor)
auditor is required, under the code of ethics, to communicate with the predecessor auditor to help the
successor auditor evaluate whether to accept or decline the engagement.
 The burden of initiating the communication rests with the successor auditor. The successor auditor shall
advise the client of the intention to contact the predecessor auditor and request permission for the
contact. However, confidentiality requires that the predecessor auditor obtain permission from the
client before the communication can be made.

The successor auditor normally inquires the following from the predecessor auditor about the
prospective client:

Integrity of management

Disagreements with management about audit procedures or accounting principles

Communication with Audit Committee about fraud, illegal acts, or internal control

Reason for change in auditor

If a client will not permit the communication or the predecessor will not provide a comprehensive
response, the successor should seriously consider the acceptability of a prospective engagement,
without considerable other investigation.

Basis of Audit Engagement

In addition, the auditor shall accept or continue an audit engagement only when the basis of audit
engagement has been agreed, through:

Establishing preconditions for an audit; and

Confirming common understanding between the auditor and management and, where appropriate,
those charged with governance (TCWG) on the terms of the audit engagement.
Preconditions for an Audit

The auditor shall establish the presence of the preconditions for an audit by:

determining that the financial reporting framework (FRF) is acceptable and is available to intended user
applied to FSs; and

obtaining the agreement of management regarding its responsibility and, where appropriate, TCWG to
the premise on which an audit is conducted.

If the preconditions are not present, the auditor shall discuss the matter with management, if not
resolved, the auditor should not accept the engagement unless required by law or regulation.

Management’s Responsibilities

The following are the management’s responsibilities, which constitute the premise on which the audit is
conducted:

Preparation and presentation of the financial statements

Design, implementation and monitoring of internal control to financial statements

To provide the auditor with:

Access to all information relevant to audit

Additional information the auditor may request

Unrestricted access to persons within the entity

Limitation on Scope Prior to Audit Engagement Acceptance

Agreement on Audit Engagement Terms

After the auditor has decided to accept or continue an audit engagement, the auditor and the client
should agree the terms of the engagement, preferably through the audit committee, if any. The agreed
terms need to be recorded in an audit engagement letter or other suitable form of contract. Audit
engagement letter is a written terms of an engagement in the form of a letter by the auditor to the
client. An engagement letter documents and confirms the auditor’s acceptance of the appointment.

It is in the interest of both the client and the auditor that the auditor sends the engagement letter,
preferably before the commencement of the audit to help avoid misunderstandings with respect to the
engagement.

Contents of the Audit Engagement Letter

Primary Contents of the Audit Engagement Letter

Engagement letter primarily includes:

The objective and scope of the audit;

The responsibilities of the auditor;

Identification of the applicable FRF; and

Reference to form and content of audit reports and statement regarding deviation from form and
content, in certain circumstances.

Additional Contents of the Audit Engagement Letter

Engagement letter may additionally include:

Elaboration of the scope of the audit

The form of any other communication of results of the audit

Audit and internal control inherent limitations

Planning and performance of the audit, including the composition of the audit team

Written representations from management

Draft financial statements from management

Audit fees, including computation and billing

Acknowledgement from management

Involvement of other auditors and experts

Involvement of internal auditors and other staff

Arrangements with the predecessor auditor

Any restriction of the auditor’s liability

Further agreements between the auditor and the entity

Any obligations to provide audit working papers to other parties

When the auditor of a parent entity is also the auditor of a component, the following factors are
considered whether to send a separate engagement letter to the component:

Who appoints the component auditor;

Whether a separate auditor’s report is to be issued on the component;

Legal requirements in relation to audit appointments;

Degree of ownership by parent; and

Degree of independence of the component management from the parent entity.

Recurring Audits

New engagement letter may not be sent annually to the same client. However, the auditor should
consider the following factors when sending new engagement letter:

Misunderstanding of the objective and scope

Any revised or special terms

A recent change of senior management

A significant change in ownership

A significant change in entity’s nature or size

A change in legal or regulatory requirements

A change in the financial reporting framework

A change in other reporting requirements