Financial Statements are premised on reporting standards to ensure acceptable preparation. On this basis, an auditor should ensure that the accounts to be audited are measured on financial reporting frameworks such as IFRS or IPSAS.
The Auditor has to obtain the agreement of management that it acknowledges and understands its responsibility:

• For the preparation of the financial statement.
• For internal controls to ensure that the financial statements are not materially misstated.
• To provide the Auditor with all relevant and requested information and unrestricted access to all personnel.

(3 points @ 2 marks each = 6 marks)

• When there is limitation on scope imposed by management such that the Auditor would not be able to express his opinion on the financial statement.
• The financial reporting framework used is unacceptable
• When management does not agree to the preconditions stated above
• Exception to this is where statute or regulation allows the Auditor to do so.

(Any 2 points @ 2 marks each = 4 marks)

The purpose of an engagement letter is to set expectations on both sides (the client and the audit firm) of the agreement.

• The objective of the audit
• The responsibility of the auditor
• Management’s responsibility for the financial statements.
• The scope of the 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 internal control, there is an unavoidable risk that even some material misstatement may remain undiscovered.
• Unrestricted access to records, documents and other information requested in connection with the audit
• Management’s responsibility for establishing and maintaining effective internal control.

(Any 4 points for 4 marks)

• Establish if the financial reporting framework to be used in the preparation of the financial statement is acceptable.
• Obtain from management that it acknowledges and understand its responsibility for the preparation of the financial statements. and
• Obtain from management that it acknowledges and understand its responsibility for internal controls to ensure that the financial statements are not materially misstated.
• To provide the auditor with all relevant and requested information and unrestricted access to all documents and records.
• Where there is evidence that there will be some limitation on the scope of the auditor’s work which will result in a disclaimer of opinion unless it is an engagement governed by law, the engagement should not be accepted.

In order to establish whether the preconditions for an audit are present, the auditor shall firstly:
(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 for:
• the preparation of the financial statements in accordance with the applicable financial reporting framework, including where relevant their fair presentation;
• 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; and
• providing the auditor with:
➢ 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;
➢ Additional information that the auditor may request from management for the purpose of the audit; and
➢ Unrestricted access to persons within the entity from whom the auditor determines it necessary to obtain audit evidence.
(c) The auditor should establish if the management or those charged with governance have imposed 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.
(d) If the preconditions for an audit are not present, the auditor shall discuss the matter with management. Unless required by law or regulation to do so, the auditor shall not accept the proposed audit engagement.

In the event of a recurring audits, the auditor shall assess whether circumstances require the terms of the audit engagement to be revised and whether there is a need to remind the entity of the existing terms of the audit engagement.
When accessing the rationale to agree to a change in the terms of the audit engagement the following should be considered:

• The auditor shall not agree to a change in the terms of the audit engagement where there is no reasonable justification for doing so.
• If, prior to completing the audit engagement, the auditor is requested to change the audit engagement to an engagement that conveys a lower level of assurance, the auditor shall determine whether there is reasonable justification for doing so.
• If the terms of the audit engagement are changed, the auditor and management shall agree on and record the new terms of the engagement in an engagement letter or other suitable form of written agreement.
• If the auditor is unable to agree to a change of the terms of the audit engagement and is not permitted by management to continue the original audit engagement, the auditor shall:

Withdraw from the audit engagement where possible under applicable law or regulation; and

Determine whether there is any obligation, either contractual or otherwise, to report the circumstances to other parties, such as those charged with governance, owners or regulators.