CHAPTER 7 Unless, required by law or regulation to do so, audit shall
not accept the proposed audit engagement:
All financial statement audits are similar in logic and in
objective. If auditor has determined that framework in preparation
Similar in logic – based on scientific method of inquiry is unacceptable, except as provided.
and must comply with the standards which are logically and If agreement referred to earlier has not been obtained.
chronologically numbered. Terms of Engagement
Similar in objective – designed to enable the auditor to After the decision is made to accept or to continue as an
formulate an opinion on financial statements. engagement, agreement should be reached to client, preferably
1) Pre-engagement – carrying out initial audit activities, through audit committee, about professional service desired,
such as client acceptance and continuance, and agreement on and engagement letter is prepared.
the terms of engagement. Engagement Letter – documents and confirms
2) Audit Planning – Developing an overall audit strategy auditor’s acceptance of the appointment, objective
and preparing the detailed audit plan. and scope, extent of his responsibilities and form of
3) Study and Evaluation of Internal Controls – report. (Interest of both client and auditor)
Documenting and evaluating the auditor’s Preferably before commencement of the engagement,
understanding of the internal control structure of the client. to avoid misunderstanding.
Based on understanding on internal controls, auditor assesses Auditor shall consider relevant considerations to have
risk and determines the appropriate audit approach. adequate basis in evaluating acceptability of
4) Substantive Testing – gathering of evidence regarding prospective client.
management’s assertions by performing substance testing Auditor and client should agree on the terms of
procedures. engagement.
5) Completing the audit – Wrapping up procedures and In case, tax, accounting, or management advisory
review of audit conclusions prior to issuance of the audit services, separate engagement letters may be
report. appropriate.
6) Issuance of the Audit Report –preparation and issuance
of audit report. Principal Contents of Engagement Letter
7) Post-audit responsibilities – debriefing Arrangements concerning the involvement of other
Pre-conditions of an audit auditors and experts in some aspects of the audit.
Arrangements concerning the involvement of internal
Auditor shall: auditors and other client staff.
Arrangements to be made with predecessor auditor, if
a) Determine whether financial reporting framework to be
any, in case of initial audit.
applied in preparation is acceptable.
Any restriction of the auditor’s liability when such
b) Obtain agreement of management that it acknowledges
possibility exists.
and understands its responsibility:
A reference to any further agreements between
Preparation of fs in accordance with applicable
auditor and client.
standards.
Any obligations to provide audit working papers to
For such internal control as management determines is
other parties.
necessary to enable operation that are free from material
misstatement.
Audits Components
To provide the auditor with: When the auditor of parent entity is also of its
subsidiary, branch or division (component), the
Access to all info of which management is aware that is factors that influence the decision whether to send a
relevant to preparation of fs (records, documentation). separate agreement letter to the component include:
Additional info that auditor may request from 1. Who appoints the auditor of the components.
management for the purpose of audit. 2. Whether a separate audit report is to be issued
on the component.
Unrestricted access to persons within the entity from
3. Legal requirements
whom auditor determines it necessary to obtain audit
4. The extent of any work performed by other
evidence.
auditors.
*If pre-conditions are not present, the auditor shall discuss the 5. Degree of ownership by parent.
matter with management.
6. Degree of independence of the component’s f) Assist, where applicable, in coordination of work done by
management from the parent entity. auditors of components and experts.
Nature and extent of planning will vary according to size
and complexity of the entity, key engagement team
members’ previous experience, and changes in
circumstances that occur during audit engagement.
Recurring Audits Audit planning involves:
Auditor should consider whether: obtaining an understanding of client and its
1. Circumstances require the terms of the engagement to be environment
revised and determining needs for experts
2. There is a need to remind the client of the existing terms of establishing materiality and audit risk
the engagement. assessing the possibility of non-compliance
Auditor may decide not to send a new engagement letter identifying related parties
each period. performing preliminary analytical procedures
development of the overall audit strategy, detailed
Changes in the Terms of Engagement audit plan, and preliminary audit programs.
1. Changes in circumstances affecting he need for the
service. Study and Evaluation of Internal Controls
2. Misunderstanding as to the nature of an audit or related Five Steps:
service originally requested. 1. Obtain and document an understanding of
3. Restriction on the scope of engagement, whether imposed internal control.
by management or caused by circumstances. 2. Make a preliminary assessment of control risk.
Auditor shall consider the justification given for the 3. Determine the auditor’s response to the risk
request, particularly the implications of a restriction on the assessment.
scope of audit engagement. 4. Reassess control risk.
Change in circumstances that affects the entity’s 5. Determine the nature, extent and timing of
requirement or misunderstanding concerning the nature of substantive tests.
service originally requested would be considered a Output of consideration of internal control would be
reasonable basis for requesting changes. finalized versions of audit strategy, audit plan and
Change would not be considered reasonable if it relates to audit programs previously developed during audit
info that is incorrect, incomplete, or unsatisfactory. planning
Accepting a Change in Engagement Substantive Testing
The report would not include reference to the original Procedures used to detect material misstatements
engagement or any procedures that may have been in account balances, classes of transactions and
performed in original engagement. disclosures.
These tests may be classified as tests of details or
Rejecting a Change in Engagement substantive analytical procedures.
Auditor should not agree to a change of engagement Test of details involve examination of items or
where there is no reasonable justification for doing so. details that comprise test of balances, test of
transactions.
Audit Planning Every audit involves test of details.
a) Helps auditor to devote appropriate attention to important Substantive analytical procedures require less
areas. time and effort, but are also less reliable as
b) Identify and resolve potential problems on a timely basis. compared to tests of details.
c) Properly organize and manage the audit engagement so it Substantive analytical procedures are not
is performed in an effective and efficient manner. required to be performed in an audit (Used only
d) Assist in the selection of engagement team members with when deemed more preferable to tests of details).
appropriate levels of capabilities and competence to After gathering evidence, auditor determines
respond to anticipated risks, and proper assignment of work whether adjustments to the fs should be made, in
to them. light of the auditor’s judgement, the criteria
e) Facilitate the direction and supervision of engagement being used and the materiality level which has
team members and review of their work. been set for engagement.
Conclusions reached based on the evaluation of Planning debriefing meetings in advance encourages
audit evidence gathered becomes the basis for as many participants as possible to attend.
preparation of audit report and expression of the If audit engagement includes segments or more than
opinion. one location, it may be appropriate to hold debriefing
meetings for some segments or locations separately.
Completing the Audit
Performs final analytical procedures.
Reads minutes of recent board and committee
meetings.
Obtains management representation letters.
Makes final materiality judgments.
Summarizes and evaluates the audit findings.
Reviews the working papers.
Reviews the financial statement presentation and
disclosures for adequacy.
Considers subsequent events.
Auditor communicates the updated list of findings to
management, and depending on circumstances, to
those charged with governance.
Issuance of the Auditor’s Report
Describes the scope of audit and states the
auditor’s conclusion, and generally
communicates to management and audit
committee.
Post-audit Responsibilities
Debriefing:
Assessing and evaluating the quality of delivery
of the audit service team.
Assessment is made regarding the audit team’s
performance in the current year to identify
successes, areas where improvements are
possible and recommendation for the following
year’s audit.
Debriefing involves:
1. Considering events during the audit.
2. Analyzing the activities within the audit.
3. Producing recommendations
Debriefing is useful forum for receiving ideas from,
and providing constructive comments to, members of
the audit service team.
Provides opportunity for members of audit service
team to learn more about entirety of audit beyond their
individual roles.
Auditors incorporate recommendations made into the
following year’s audit strategy and audit plan.
Engagement partner is responsible for leading
debriefing and setting the direction for improvement
of both individual and team performance in the future,
Engagement partner is also responsible for follow-up
in developing subsequent year’s audit strategy.
