ISA 210: Agreeing the Terms of Audit Engagement
SCOPE OF THIS ISA 210:
> Deals with the auditor’s responsibility in agreeing the terms of the audit engagement with
the management and those charged with the governance.
> By agreeing the terms, this establishes certain preconditions for an audit, where the
responsibility for the preconditions rests with the management.
> Audit Engagement - formal agreement between an auditor and a client
OBJECTIVE:
> The auditor’s objective is to accept an audit engagement only when the basis of the
performance has been agreed.
> As said earlier, as soon as the auditor accepts the audit engagement, the auditor checks
whether the preconditions for an audit are present.
> Their objective also includes, confirming whether there is an agreement between the
auditor and their client.
AGREEMENT ON AUDIT ENGAGEMENT TERMS
The roles of management and governance in a company's audit engagement
are determined by the entity's governance structure and relevant laws or regulations.
To avoid misunderstandings, the auditor sends an engagement letter before the audit
commences, benefiting both parties.
FORM AND CONTENT OF THE ENGAGEMENT LETTER
This varies from each entity. The information on the auditor's responsibilities
in the engagement letter may be based from ISA 200.
The Agreement in the audit engagement shall be recorded in an audit
engagement letter or other suitable form of WRITTEN AGREEMENT.
Engagement Letter’s Contents: (ORIES)
- Objective & scope of the audit of the FS
- Responsibilities of the auditor and management
- Identification of the applicable financial reporting framework for the
preparation of the FS
-
Reference to the expected form and content of any reports to be issued by the
auditor
- Statement that there may be circumstances in which at a report may differ
from its expected form and content
Note: If a law or regulation clearly outlines the terms of an audit engagement, the
auditor doesn't need to record them in a written agreement, provided management
understands its responsibilities.
Key audit matters
- In certain jurisdictions, auditors may need to reference the possibility of
communicating key audit matters in their report, even if they are not required
to do so.
When relevant, the following points could also be made in the audit engagement
letter:
AGREEMENTS
● concerning the involvement of
other auditors and experts in
some aspects of the audit,
including the internal auditors
and other staff of the entity.
● to be made with the predecessor
auditor, if any, in the case of an
initial audit.
REFERENCE
● The auditor's responsibilities
under law, regulation, or ethical
requirements
● to any further agreements
between the auditor and the
entity
RESTRICTION
● auditor’s liability
possibility exists
OBLIGATION
● to provide audit working papers
to other parties
when
such
AUDIT OF COMPONENTS
Auditor of a parent company is also an auditor of the subsidiary/branch (component).
Factors influencing the decision to send a separate audit 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.
Responsibilities of Management Prescribed by Law or Regulation
If an auditor decides not to record certain audit engagement terms in an engagement
letter, they must still seek written agreement from management. The agreement may use
law or regulation language if it establishes equivalent responsibilities for management. The
accounting profession, audit standards setter, or regulator may provide guidance on this.
Considerations specific to public sector entities
Law or regulation governing the operations of public sector audits generally mandate
the appointment of a public sector auditor and commonly set out the public sector auditor’s
responsibilities and powers, including the power to access an entity’s records and other
information.
RECURRING AUDITS
➢ The auditor may decide not to send a new engagement letter, if it is a recurring audit.
➢ The auditor shall assess whether the audit engagement terms needs to be revised or
to remind the entity of the existing terms of the audit engagement.
The audit engagement terms may need revision due to various factors:
- indication that the entity misunderstands the objective and scope of the audit.
- revised or special terms of the audit engagement.
- recent change of senior management
- significant change in ownership, entity’s nature and size, and legal or regulatory
requirement
- change in the financial reporting framework adopted in the preparation of the
financial statements and other reporting requirements