You have been assigned as the training manager in your audit firm. The Partners of your firm tasked you to take the newly recruited trainees through ISA 210: Agreeing the Terms of Audit Engagement. This deals with the auditor’s responsibilities in agreeing the terms of the audit engagement with management and those charged with governance.
The ISA states that the auditor shall agree the terms of the audit engagement with management or those charged with governance, as appropriate, and these terms can be recorded in an audit engagement letter or other suitable form of written agreement.
Required:
Prepare briefing notes:
i) Describing the main actions an Auditor should take in order to establish whether the pre-conditions for an audit are present. (6 marks)
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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.
ii) Outlining when an auditor should change the terms of the audit engagement in relation to a recurring audit. (4 marks)
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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.