SA 210 AGREEING THE TERMS OF AUDIT ENGAGEMENT
• The purpose of this standard is to establish standards on
1. agreeing the terms of the engagement with the client, and
2. the auditor's response to a request by a client to change the terms of an engagement to one
that provides a lower level of assurance.
• The auditor and the client should agree on the terms of engagement. The agreed terms would
need to be recorded in an audit engagement letter.
• This standard is intended to assist the auditor in the preparationof engagement letters relatingto
audits of financial statements.
Objective
The objective of the auditor is to accept or continue an audit engagement only when the basis
upon which it is to be performed has been agreed, through:
(a) Establishing whether the preconditionsfor an audit are present; and
b) Confirming that there is a common understanding between the auditor and management of the
terms of the audit engagement.
Preconditions for an audit - The use by managementof an acceptable financial reporting
framework in the preparation of the financial statements and the agreement of management to the
premise on which an audit is conducted.
• In order to establish whether the preconditionsfor an audit are present, the auditor shall:
(a) Determine whether the financial reporting framework to be applied in the preparation of the
financial statements is acceptable; and
(b) Obtain the agreement of management that it acknowledges and understands its responsibility:
(i) For the preparationof the financial statementsin accordance with the applicable financial
reporting framework.
(ii) For such internal control as management determines is necessary to enable the preparationOf
financial statements that are free from material misstatement, whether due to fraud or error; and
(iii) To provide the auditor with:
a. Access to all information of which management is aware that is relevant to the preparationOf
the financial statements.
b. Additional information that the auditor may request from management for the purpose of the
audit; and
c. Unrestricted access to persons within the entity from whom the auditor determines it necessary
to obtain audit evidence.
Limitation on scope prior to audit engagement acceptance - If management impose a limitationon
the scope of the auditor's work in the terms of a proposed audit engagement such that the audit0r
believes the limitation will result in the auditor disclaiming an opinion on the financial statements'
the auditor shall not accept such a limitedengagement as an audit engagement, unless required
by law or regulation to do so.
Audit Engagement Letter In the interest
engagement letter, preferably of both client and auditor,the auditor should send an
before the commencementof
misunderstanding with respect to the the engagement, to help avoid any
engagement.
principal contents of audit engagement
letter:
1. Objective of audit of financial
statements.
2. Management's responsibility for
the financial statements.
3. Management's responsibility
for selection and consistent application of accounting policies and
accounting standards.
4. Management's responsibility for
preparing the financial statements on a going concern basis.
5. Management's responsibility for
making judgments and estimates that are reasonable and
prudent.
Management's responsibility for the maintenance of adequate records and internal controls.
7 The scope of audit including reference to applicable
legislation, regulations etc.
The fact that due to inherent limitationsof internalcontrolsystem there is an unavoidable risk
that some fraud & error may remain undetected.
9. Unrestricted access to whatever records, documentationand other informationrequested. in
connection with audit
Other matters in the engagement letter:
• Planning of the audit.
• Expectation of receiving from management written confirmationconcerning representations
made in connection with the audit.
• Request for the client to confirm the terms of engagement by acknowledging the receipt of the
engagement letter.
• 4. Any other reports or letters the auditorexpects to issue.
5. Fees & billing arrangements.
• 6. Involvement of other auditors and experts.
7. Involvement of internal auditors and other staff of the client.
8. Arrangement with predecessor auditor.
9. Any restrictions of the auditors liability, where such possibility exists.
Audit of components —When the auditorof a parententity is also the auditorof its subsidiary or
branch the factors that influence the decision whether to send a separate engagement letter to the
component include:
1. Whether separate audit report is to be issued on the component.
• Legal requirements.
• The extent of any work performed by other auditors.
4. Degree of ownership by parent.
5. Degree of independence of the management of the component.
Recurring audits The auditor should consider whethercircumstances require the terms of the
engagement to be revised and whether there is a need to remind the client of the existing terms of
the engagement.
Acceptance of a change in environment An auditor who before the completion of the
engagement to one which provides a lower level of
engagement, is requested to change the
of doing so.
assurance, should consider the appropriateness
affects the entity's requirements or a misunderstanding concerning
A change in circumstances that
requested would ordinarilybe considered a reasonable basis for
the nature of service originally
requesting change in engagement.
auditor should consider any legal or contractual implications of the
Before agreeing to change, the
change.
are changed, the auditorand client would agree on new terms.
Where the terms of engagement
• The auditor would not agree to change of engagementif there is no reasonable justificationfor
doing so.
If the auditor is unable to agree to a change of the engagement than he should withdraw from the
engagement.
