MODULE 3: PROFESSIONAL RESPONSIBILITIES
Professional Responsibilities
I. Professional Responsibilities
Responsibilities in the audit engagements are covered by nine (9) pronouncements of the Auditing and
Assurance Council (AASC), formerly called the Auditing Standards and Practices Council (ASPC).
These Philippine Standards of Auditing (PSAs) include the following:
 PSA 200 (Revised and Redrafted) – Overall Objective of the Independent Auditor and the Conduct
of an Audit in Accordance with Philippine Standards on Auditing.
 PSA 210 (Redrafted) – Agreeing the Terms of Audit Engagements.
 PSA 220 (Redrafted) - Quality Control for an Audit of Financial Statements.
 PSA 230 (Redrafted) - Audit Documentation.
 PSA 240 (Redrafted) - The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial
Statements.
 PSA 250 (Redrafted) – Consideration of Laws and Regulations in an Audit of Financial Statements.
 PSA 260 (Revised and Redrafted) – Communication with Those Charged with Governance.
 PSA 265 – Communicating Deficiencies in Internal Control to Those Charged with Governance and
Management.
 PSQC 1 – Quality Control for Firms that Perform Audits and Reviews of Historical Financial
Information, and Other Assurance and Related Services Engagements.
II. Quality Control to Provide Audit, Review and other Assurance Engagements
The firm should establish a system of quality control which consist of policies designed to provide it
with reasonable assurance that the firm and its personnel comply with professional standards and
regulatory and legal requirements, and that reports issued by the firm or engagement partners are
appropriate in the circumstances and the procedures necessary to implement and monitor compliance
with those policies. The quality control policies and procedures should be documented and
communicated to the firm’s personnel
Elements of Quality Control
a) Leadership responsibilities for quality within the firm
b) Ethical requirements
c) Acceptance and continuance of client relationships and specific engagements
d) Human resources
e) Engagement performance
f)
Monitoring
a. Leadership responsibilities for quality within the firm

The firm should establish policies and procedures designed to promote an internal culture
based on the recognition that quality is essential in performing engagements. Such policies and
procedures should require the firm’s chief executive officer (or equivalent) or, if appropriate, the
firm’s managing board of partners (or equivalent), to assume ultimate responsibility for the firm’s
system of quality control.
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Any person or persons assigned operational responsibility for the firm’s quality control system
by the firm’s chief executive officer or managing board of partners should have sufficient and
appropriate experience and ability, and the necessary authority, to assume that responsibility.
b. Ethical Requirements


The firm should establish policies and procedures designed to provide it with reasonable
assurance that the firm and its personnel comply with relevant ethical requirements.
Independence
The firm should establish policies and procedures designed to provide it with reasonable
assurance that the firm, its personnel and, where applicable, others subject to independence
requirements (including experts contracted by the firm and network firm personnel), maintain
independence where required by the Philippine Code. Such policies and procedures should
enable the firm to:
a) Communicate its independence requirements to its personnel and, where applicable, others
subject to them; and
b) Identify and evaluate circumstances and relationships that create threats to independence,
and to take appropriate action to eliminate those threats or reduce them to an acceptable
level by applying safeguards, or if considered appropriate, to withdraw from the
engagement.
Such policies and procedures should require:
a) Engagement partners to provide the firm with relevant information about client
engagements, including the scope of services, to enable the firm to evaluate the overall
impact, if any, on independence requirements;
b) Personnel to promptly notify the firm of circumstances and relationships that create a threat
to independence so that appropriate action can be taken; and
c) The accumulation and communication of relevant information to appropriate personnel so
that:
1. The firm and its personnel can readily determine whether they satisfy independence
requirements;
2. The firm can maintain and update its records relating to independence; and
3. The firm can take appropriate action regarding identified threats to independence

The firm should establish policies and procedures designed to provide it with reasonable
assurance that it is notified of breaches of independence requirements, and to enable it to take
appropriate actions to resolve such situations. The policies and procedures should include
requirements for:
a) All who are subject to independence requirements to promptly notify the firm of
independence breaches of which they become aware;
b) The firm to promptly communicate identified breaches of these policies and procedures to:
1. The engagement partner who, with the firm, needs to address the breach; and
2. Other relevant personnel in the firm and those subject to the independence
requirements who need to take appropriate action; and
3. Prompt communication to the firm, if necessary, by the engagement partner and the
other individuals referred of the actions taken to resolve the matter, so that the firm can
determine whether it should take further action.
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At least annually, the firm should obtain written confirmation of compliance with its policies and
procedures on independence from all firm personnel required to be independent by the Philippine
Code.
c. Acceptance and Continuance of Client Relationships and Specific Engagements

The firm should establish policies and procedures for the acceptance and continuance of client
relationships and specific engagements, designed to provide it with reasonable assurance that it
will only undertake or continue relationships and engagements where it:
a) Has considered the integrity of the client and does not have the information that would lead
it to conclude that the client lacks integrity;
b) Is competent to perform the engagement and has the capabilities, time and resources to do
so; and
c) Can comply with ethical requirements

The firm should obtain such information as it considers necessary in the circumstances before
accepting an engagement with a new client, when deciding whether to continue an existing
engagement, and when considering acceptance of a new engagement with an existing client.
Where issues have been identified, and the firm decides to accept to continue the client
relationship or a specific engagement, it should document how the issues were resolved.

With regard to the integrity of a client, matters that the firm considers include, for example:
1. The identity and business reputation of the client’s principal owners, key management,
related parties and those charged with its governance
2. The nature of the client’s operations, including its business practices
3. Information concerning the attitude of the client’s principal owners, key management and
those charged with its governance towards such matters as aggressive interpretation of
accounting standards and the internal control environment
4. Whether the client is aggressively concerned with maintaining the firm’s fees as low as
possible
5. Indications of an inappropriate limitation in the scope of work
6. Indications that the client might be involved in money laundering or other criminal activities
7. The reasons for the proposed appointment of the firm and non-reappointment of the
previous firm
8. The extent of knowledge of a firm will have regarding the integrity of a client will generally
grow within the context of an ongoing relationship with that client
Information on such matters that the firm obtains may come from, for example:
1. Communications with existing or previous providers of professional accountancy services to the
client in accordance with the Philippine Code, and discussions with other third parties.
2. Inquiry of other firm personnel or third parties such as bankers, legal counsel and industry
peers.
3. Background searches of relevant databases.

In considering whether the firm has the capabilities, competence, time and resources to undertake a
new engagement from a new or an existing client, the firm reviews the specific requirements of the
engagement and existing partner and staff profiles at all relevant levels. Matters the firm considers
include whether:
1. Firm personnel have knowledge of relevant industries or subject matters;
2. Firm personnel have experience with relevant regulatory or reporting requirements, or the ability
to gain the necessary skills and knowledge effectively;
3. The firm has sufficient personnel with the necessary capabilities and competence;
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4. Experts are available, if needed;
5. Individuals meeting the criteria and eligibility requirements to perform engagement quality
control review are available, where applicable; and
6. The firm is able to complete the engagement within the reporting deadline

Where the firm obtains information that would have caused it to decline an engagement if that
information had been available earlier, policies and procedures on the continuance of the
engagement and the client relationship should include consideration of:
1. The professional and legal responsibilities that apply to the circumstances, including whether
there is a requirement for the firm to report to the person or persons who made the
appointment, or, in some cases, to regulatory authorities; and
2. The possibility of withdrawing from the engagement or from both the engagement and the client
relationship.

Policies and procedures on withdrawal from an engagement or from both the engagement and the
client relationship address issues include the following:
1. Discussing with the appropriate level of the client’s management and those charged with
governance regarding the appropriate action that the firm might take based on the relevant facts
and circumstances.
2. If the firm determines that is appropriate to withdraw, discussing with the appropriate level of the
client’s management and those charged with its governance withdrawal from the engagement
or from both the engagement and the client relationship, and the reasons for the withdrawal.
3. Considering whether there is a professional, regulatory or legal requirement for the firm to
remain in place, or for the firm to report the withdrawal from the engagement, or from both the
engagement and the client relationship, together with the reasons for the withdrawal, to
regulatory authorities.
4. Documenting significant issues, consultations, conclusions and the basis for the conclusions.
Human Resources

The firm should establish policies and procedures designed to provide it with reasonable
assurance that it has sufficient personnel with the capabilities, competence, and commitment to
ethical principles necessary to perform its engagements in accordance with professional
standards and regulatory and legal requirements and to enable the firm or engagement partners
to issue reports that are appropriate in the circumstances.
Such policies and procedures address the following personal issues:
1.
2.
3.
4.
5.
6.
7.
8.
Recruitment;
Performance evaluation;
Capabilities;
Competence;
Career development;
Promotion;
Compensation; and
The estimation of personnel needs
Engagement Performance

The firm should establish policies and procedures designed to provide it with reasonable
assurance that engagements are performed in accordance with professional standards and
regulatory and legal requirements, and that the firm or the engagement partner issue reports
that are appropriate in the circumstances.
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Through its policies and procedures, the firm seeks to establish consistency in the quality of
engagement performance. This is often accomplished through written or electronic manuals,
software tools or other forms of standardized documentation, and industry or subject matterspecific guidance materials. Matters addressed include the following:
1. How engagement teams are briefed on the engagement to obtain an understanding of the
objectives of their work
2. Processes for complying with applicable engagement standards
3. Processes of engagement supervision, staff training and coaching
4. Methods of reviewing the work performed, the significant judgments made and the form of
report being issued
5. Appropriate documentation of the work performed and of the timing and extent of the review
6. Processes to keep all policies and procedures current
Monitoring

The firm should establish policies and procedures designed to provide it with reasonable
assurance that the policies and procedures relating to the system of quality control are relevant,
adequate, operating effectively and complied with its practice. Such policies and procedures
should include an ongoing consideration and evaluation of the firm’s system of quality control,
including a periodic inspection of a selection of completed engagements.

The purpose of monitoring compliance with quality control policies and procedures is to provide
an evaluation of:
1. Adherence to professional standards and regulatory and legal requirements;
2. Whether the quality control system has been appropriately designed and effectively
implemented; and
3. Whether the firm’s quality control policies and procedures have been appropriately applied, so
that reports that are issued by the firm or engagement partners are appropriate in the
circumstances.
The firm should evaluate the effect of deficiencies noted as a result of the monitoring process
and should determine whether they are either:

a)
b)
Instances that do not necessarily indicate that the firm’s system of quality control is insufficient
to provide it with reasonable assurance that it complies with professional standards and
regulatory and legal requirements, and that the reports issued by the firm or engagement
partners are appropriate in the circumstances; or
Systematic, repetitive, or other significant deficiencies that require prompt corrective action.

The firm should communicate to relevant engagement partners and other appropriate personnel
deficiencies noted as a result of the monitoring process and recommendation for appropriate
remedial action.

The firm’s evaluation of each type of deficiency should result in recommendations for one or more of
the following:
a) Taking appropriate remedial action in relation to an individual engagement or member of
personnel;
b) The communication of the findings to those responsible for training and professional
development;
c) Changes to the quality control policies and procedures; and
d) Disciplinary action against those who fail to comply with the policies and procedures of the firm,
especially those who do so repeatedly.
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At least annually, the firm should communicate the results of the monitoring of its quality control
system to engagement partners and other appropriate individuals within the firm, including the firm’s
chief executive officer or, if appropriate, its managing board of partners. Such communication
should enable the firm and these individuals to take prompt and appropriate action where necessary
in accordance with their defined roles and responsibilities. Information communicated should
include the following:
a) A description of the monitoring procedures performed
b) The conclusions drawn from the monitoring procedures
c) Where relevant, a description of systematic, repetitive or other significant deficiencies and of the
actions taken to resolve or amend those deficiencies
Engagement Quality Control Review
An engagement quality control review ordinarily involves discussion with the engagement partner, a
review of the financial statements or other subject matter information and the report, and, in particular,
consideration of whether the report is appropriate. It also involves a review of selected working papers
relating to the significant judgments the engagement team made and the conclusions they reached.
The extent of the review depends on the complexity of the engagement and the risk that the report
might not be appropriate in the circumstances. The review does not reduce the responsibilities of the
engagement partner.
An engagement quality control review for audits of financial statements of listed entities includes
considering the following:
a. The engagement team’s evaluation of the firm’s independence in relation to the specific
engagement
b. Significant risks identified during the engagement and the responses to those risks
c. Judgments made, particularly with respect to materiality and significant risks
d. Whether appropriate consultation has taken place on matters involving differences of opinion or
other difficult or contentious matters, and the conclusions arising from those consultations
e. The significance and disposition of corrected and uncorrected misstatements identified during the
engagement
f. The matters to be communicated to management and those charged with governance and, where
applicable, other parties such as regulatory bodies
g. Whether working papers selected for review reflect the work performed in relation to the significant
judgments and support the conclusions reached.
h. The appropriateness of the report to be issued.
The firm’s policies and procedures are designed to maintain the objectivity of the engagement quality
control reviewer. For example, the engagement quality control reviewer:
a.
b.
c.
d.
Is not selected by the engagement partner;
Does not otherwise participate in the engagement during the period of review;
Does not make decisions for the engagement team;
Is not subject to other consideration that would threaten the reviewer’s objectivity
Policies and procedures on documentation of the engagement quality control review should require
documentation that:
a) The procedures required by the firm’s policies on engagement quality control review have been
performed;
b) The engagement quality control review has been completed before the report is issued; and
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c) The reviewer is not aware of any unresolved matters that would cause the reviewer to believe that
the significant judgments the engagement team made and the conclusions they reached were not
appropriate.
Complaints and Allegation
The firm should establish policies and procedures designed to provide it with reasonable at it deals
appropriately with
a. Complaints and allegations that the work performed by the firm fails to comply with professional
standards and regulatory and legal requirements , and
b. Allegations of non-compliance with the firm’s system of quality control.
Documentation
The firm should establish policies and procedures requiring appropriate documentation to provide
evidence of the operation of each element of its system of quality control.
Factors to consider when determining the form and content of documentation evidencing the operation
of each of the elements of the system of quality control include the following:
 The size of the firm and the number of offices.
 The degree of authority both personnel and offices have.
 The nature and complexity of the firm’s practice and organization.
Definition of Terms – Quality Control
a)
Engagement partner” – the partner or other person in the firm who is responsible for the
engagement and its performance, and for that report that is issued on behalf of the firm, and who,
where required, has the appropriate authority from a professional, legal or regulatory body;
b)
“Engagement quality control review” – a process designed to provide an objective evaluation,
before the report is issued, of the significant judgments the engagement team made and the
conclusions they reached in formulating the report;
c)
“Engagement quality control reviewer” – a partner, other persons in the firm, suitably qualified
external person, or a team made up of such individuals with sufficient and appropriate experience
and authority to objectively evaluate, before the report is issued, the significant judgments the
engagement team and the conclusions they reached in formulating the report;
d)
“Engagement team” – all personnel performing an engagement, including any experts contracted
by the firm in connection with that engagement;
e)
“Firm” – a sole practitioner or partnership or other entity of professional accountants;
f)
“Inspection” – in relation to completed engagements, procedures designed to provide evidence of
compliance by engagement team with the firm’s quality control policies and procedures;
g)
“Listed entity” – an entity whose shares, stock or debt quoted or listed on a recognized stock
exchange, or are market under the regulations of a recognized stock exchange or other
equivalent body;
h)
“Monitoring” – a process comprising an ongoing consideration and evaluation of the firm’s system
of quality control, including a periodic inspection of a selection of completed engagements,
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designed to enable the firm to obtain reasonable assurance that its system of quality control is
operating effectively;
i)
“Network firm” – an entity under common control, ownership or management with the firm or any
other entity that is reasonable and informed third party having knowledge of all relevant
information would reasonably conclude as being part of the firm nationally or internationally;
j)
“Partner” – any individual with authority to bind the firm with respect to the performance of a
professional services engagement;
k)
“Personnel” - partners and staff;
l)
“Professional standards” – AASC Engagement Standards, as defined in the AASC’s Preface to
the Philippine Standards on Quality Control, Auditing, Assurance and Related Services,” and
relevant ethical requirements, which ordinarily comprise Part A and B of the Philippine Code;
m)
“Reasonable assurance” – in the context of this PSQC, a high, but not absolute, level of
assurance;
n)
“Staff” – professionals, other than partners, including any experts the firm employs; and
o)
“Suitably qualified external person” – an individual outside the firm with the capabilities and
competence to act as an engagement partner, for example, a partner of another firm, or an
employee (with appropriate experience) of either a professional accountancy body whose
members may perform audits and reviews of historical financial information, or other assurance or
related services engagements, or of an organization that provides relevant quality control
services.
III. Quality Control for Audits of Historical Financial Information
PSA 220 Redrafted “Quality Control for an Audit of Financial Statement”, deals with the specific
responsibilities of the auditor regarding quality control procedures for an audit of financial statements. It
also addresses, where applicable, the responsibilities of the engagement quality control reviewer.
A quality control system is a set of policies and procedures designed to provide reasonable
assurance that the public accounting firm complies with professional standards. The nature and extent
of a firm’s quality control policies and procedures depend on such factors as:
1.
2.
3.
4.
5.
6.
Its size and nature of its policies
Degree of operating autonomy allowed to its personnel
The nature of its practice
Its organization
Its geographic dispersion
Appropriate costs/benefit consideration
System of Quality Control and Role of Engagement Teams
Quality control systems, policies and procedures are the responsibility of the audit under PSQC 1
(Redrafted), the firm has an obligation to establish and maintain a system of quality control to provide
with reasonable assurance that
a) The firm and its personnel comply with professional standards and regulatory and legal
requirements, and
b) The reports issued by the firm or engagement partners are appropriate in the circumstances.
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Engagement Teams
1. Implement quality control procedures that are applicable to the audit engagement
2. Provide the firm with relevant information to enable the functioning of that part of the firm’s system
of quality control relating to independence,
Quality control policies should be implemented at both the level of audit firm (i.e. partners of a firm
providing audit services or a sole practitioner providing audit services, as appropriate) and on individual
audits.
I.
Leadership Responsibilities for Quality on Audits
The engagement partner should take responsibility for the overall quality on each audit engagement
to which the partner is assigned. This includes such actions and messages which emphasize:
a. The importance of:
1. Performing work that complies with professional standards and regulatory and legal
requirements.
2. Complying with the firm’s quality control policies and procedures as applicable; and
3. Issuing auditor’s reports that are appropriate in the circumstances
b.
II.
The fact the quality is essential in performing audit engagements.
Ethical Requirements
The engagement partner should consider whether members of
complied with ethical requirements which include:
a. Integrity
b. Objectivity
c. Professional competence and due care
d. Confidentiality
e. Professional behavior.
the engagement team have
The engagement partner should form a conclusion on compliance with independence requirements
that apply to the audit engagement. In doing so, the engagement partner should:
a. Obtain relevant information from the firm and, where applicable, network firms to identify and
evaluate circumstances and relationships that create threats to independence.
b. Evaluate information on identified breaches, if any, of the firm’s independence policies and
procedures to determine whether they create a threat to independence for the audit
engagement.
c. Take appropriate action to eliminate such threats or reduce them to an acceptable level by
applying safeguards. The engagement partner should promptly report to the firm any failure to
resolve the matter for appropriate action.
d. Document conclusion on independence and any relevant discussions with the firm that support
these conclusions.
III. Acceptance and Continuance of Client Relationships and Specific Audit Engagements
The engagement partner should be satisfied that appropriate procedures regarding the acceptance
and continuance of client relationships and specific audit engagements have been followed and that
conclusions reached in this regard are appropriate and have been documented.
IV.
Assignment of Engagement Teams
The engagement partner should be satisfied that the engagement team collectively has the
appropriate capabilities, competence and time to perform the audit engagement in accordance
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with professional standards and regulatory and legal requirements, and to enable an auditor’s
report that is appropriate in the circumstances to be issued.
V.
Engagement Performance
The engagement partner should take responsibility for the direction, supervision and performance
of the audit engagement in compliance with professional standards and regulatory and legal
requirements, and for the auditor’s report that is issued to be appropriate in the circumstances.
This includes:
 Direction, supervision and performance
 Reviews
 Consultation
 Engagement quality control review
 Resolution of differences of opinion
VI.
Monitoring
An effective system of quality control includes a monitoring process designed to provide the firm
with reasonable assurance that its policies and procedures relating to the system of quality control
are relevant, adequate and operating effectively.
The engagement partner considers the results of the monitoring process as evidenced in the
latest information circulated by the firm and, if applicable, other network firms. The engagement
partner considers:
 Whether deficiencies noted in that information may affect the audit engagement,
 Whether the measures the firm took to rectify the situation are sufficient in the context of that
audit.
Documentation
The auditor shall document
1. Issues identified with respect to compliance with relevant ethical requirements and how they
were resolved.
2. Conclusions on compliance with independence requirements that apply to the audit
engagements, and any relevant discussions with the firm that support these conclusions.
3. Conclusions reached regarding the acceptance and continuance of client relationships and
audit engagements.
4. The nature and scope of, and conclusions resulting from, consultations undertaken during the
course of the audit engagement.
The engagement quality control reviewer shall document, for the audit engagement reviewed, that
1. The procedures required by the firm’s policies on engagement quality control review have been
performed.
2. The engagement quality control review has been completed on or before the date of the
auditor’s report.
3. The reviewer is not aware of any unresolved matters that would cause the reviewer to believe
that the significant judgments the engagement team made and the conclusions they reached
were not appropriate.
IV. Terms of Audit Engagement
PSA 210 Redrafted, “Agreeing the Terms of Audit Engagement” deals with the auditor’s
responsibilities in agreeing the terms of audit engagement with management and where appropriate,
those charged with governance. This includes establishing that certain preconditions for an audit,
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responsibility for which rests with management and, where appropriate, those charged with governance
are present. It also deals with those aspects of engagement acceptance that are within the control of
the auditor.
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
1. Establishing whether the preconditions for an audit are present
2. Confirming that there is a common understanding between the auditor and management and,
where appropriate, those charged with governance of the terms of audit engagement.
Preconditions for an Audit
In order to establish whether the preconditions for an audit are present, the auditor shall :
1. Determine whether the financial reporting framework to be applied in the preparation of the financial
statements is acceptable, and
2. Obtain the agreement of management that it acknowledges and understands the responsibility
a. For the preparation of the financial statements in accordance with the applicable financial
reporting framework, including where relevant their fair presentation.
b. For such internal control as management determines is necessary to enable the preparation of
financial statements that are free from material misstatement, whether due to fraud or error
c. To provide the auditor with
1. Access to all information of which management is aware that is relevant to the preparation
of the financial statements such as records, documentation and other matters.
2. Additional information that the auditor may request from management for the purpose of the
audit.
3. Unrestricted access to persons within the entity from whom the auditor determines it
necessary to obtain evidence.
Factors to determine the acceptability of the Financial Reporting Framework
1.
2.
3.
4.
The nature of the entity.
The purpose of the financial statements.
The nature of the financial statements.
Whether law or regulation prescribes the applicable financial reporting framework.
Limitation on Scope Prior to Audit Engagement Acceptance
If management or those charged with governance imposes a limitation on the scope of the auditor’s
work in the terms of a proposed audit engagement such that the auditor believes the limitation will result
in the auditor disclaiming an opinion on the financial statements, the auditor shall not accept such a
limited engagement as an audit engagement, unless required by law or regulation to do so.
Agreement on Audit Engagement Terms
Once the aforementioned issues have been discussed to the satisfaction of both parties, the agreed
terms of the audit engagement shall be recorded in an audit engagement letter or other suitable
form written agreement and shall include
1.
2.
3.
4.
The objective and scope of the audit of the financial statements.
The responsibilities of the auditor.
The responsibilities of management.
Identification of the applicable financial reporting framework for the preparation of the financial
statements.
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5. Reference to the expected form and content of any reports to be issued by the auditor and a
statement that there may be circumstances in which a report may differ from its expected form
and content.
Definition of Engagement Letter
-
A formal written agreement between the CPA firm and the client for the conduct of the audit and
related services.
Uses of the Engagement Letter
a. An engagement letter is a written contract between an auditor and a client which generally serves to
1. Minimize misunderstandings with respect to the engagement.
2. Document and confirm the auditor’s acceptance of the engagement, the objective and scope of
the audit , the extent of the auditor’s responsibilities t the client and the form of any reports.
b. This is usually sent by the auditor before the commencement of the engagement .
Principal Contents of the Engagement Letter
1.
2.
3.
4.
5.
6.
7.
8.
The objectives of the audit of financial statements.
Management’s responsibility for the financial statements.
The financial reporting framework adopted by management in preparing the financial statements,
i.e. the applicable financial reporting framework.
The scope of audit, including reference to applicable legislation, regulations or pronouncements of
professional bodies to which the auditor adheres.
The form of any reports or other communication of results of the engagement.
The fact that because of the test nature and other inherent limitations of an audit, together with
the inherent limitations of any accounting and internal control systems, there is an unavoidable
risk that even some material misstatement may remain undiscovered.
Unrestricted access to whatever records, documentation and other information requested in
connection with the audit..
The management’s responsibility for establishing and maintaining effective internal control.
Other Matters That the Auditor May Wish to Include in the Engagement Letter
9.
10.
11.
12.
13.
Arrangements regarding the planning of the audit.
Expectation of receiving from management written confirmation concerning representations made
in connection with the audit.
Request for the client to confirm the terms of the engagement by acknowledging receipt of the
engagement letter.
Description of any other letters or reports the auditor expects to issue to the client.
Basis on which fees are computed and any billing arrangements.
Other Relevant Points for Inclusion in the Engagement Letter
14.
15.
16.
17.
18.
Arrangements concerning the involvement of other auditors and experts in some aspects of the
audit.
Arrangement concerning the involvement of internal auditors and other client staff.
Arrangements to be made with the predecessor auditor, if any, in the case of an initial audit.
Any restriction of the auditor’s liability when such possibility exists.
A reference to any further agreements between the auditor and the client.
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Audit of Components
When the auditor of a parent entity is also the auditor of its subsidiary, branch or division (component),
the factors that influence the decision whether to send a separate engagement letter to the component
include:
1.
Who appoints the auditor of the component
2.
Whether a separate audit report is to be issued on the component
3.
Legal requirements
4.
The extent of any work performed by other auditors
5.
Degree of ownership by parent
6.
Degree of independence of the component’s management
Client Continuance
Auditors must not only decide whether to accept new clients; they also should periodically review their
list of current clients and remove those clients the firm no longer wants to be associated with.
Reasons for discontinuing clients might include:
1. Evidence indicating a client’s management may lack integrity
2. Difficulty in working with client personnel
3. Inability to negotiate an acceptable increase in the audit fee
4. Client need for specialized services the current audit firm is unable or unwilling to provide.
Recurring Audits
On recurring audits, the auditor should consider whether circumstances require the terms of
engagement to be revised and whether there is a need to remind the client of the existing terms
of engagement.
The auditor may decide not to send a new engagement letter each period. However, the following
factors may make it appropriate to send a new letter:
1. Any indication that the client misunderstands the objective and scope of the audit.
2. Any revised or special terms of the engagement.
3. A recent change in senior management, board of directors, or ownership.
4. A significant change in nature or size of the client’s business.
5. Legal requirements.
6. A change in the financial reporting framework adopted by management in preparing the financial
statements.
Acceptance of a Change in Engagement
An auditor who, before the completion of the engagement, is requested to change the engagement to
one which provides a lower level of assurance, should consider the appropriateness of doing so.
Some of the reasons that may prompt the client to request the auditor to change the engagement are:
1. Change in circumstances affecting the need for the service
2. A misunderstanding as to the nature of an audit or related service originally requested, and
3. Restriction on the scope of the engagement whether imposed by management or caused by
circumstances.
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MODULE 3 LECTURE