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Accepting an Audit Engagement


 
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Accepting audit engagements

Preconditions for an audit

Auditors should only accept a new audit engagement, or continue an existing audit engagement if the 'preconditions for an audit' required by ISA 210 Agreeing the terms of audit engagements are present.

ISA 210 requires the auditor to:

  • Determine whether the financial reporting framework to be applied in the preparation of the financial statements is appropriate; and
  • Obtain the agreement of management that it acknowledges and understands its responsibilities.

If the preconditions for an audit are not present, the auditor should discuss the matter with management, and should not accept the engagement unless required to do so by law or regulation.

Procedures

If offered an audit role, the auditor should:

  • ask the client for permission to contact the outgoing auditor (reject role if client refuses)
  • contact the outgoing auditor, asking for any reasons why they should not accept appointment. If a reply is not received, the prospective auditor should try and contact the outgoing auditor by other means e.g. by telephone. If a reply is still not received the prospective auditor may still choose to accept but must proceed with care.
  • ensure that the legal requirements in relation to the removal of the previous auditors and the appointment of the firm have been met
  • carry out checks to ensure the firm can be independent, is competent to do this audit and has the necessary resources
  • assess whether this work is suitably low risk
  • assess the integrity of the company's directors
  • as a commercial organisation, the firm should also ensure that this is a desirable client (e.g. right industry, suitable profit margin etc)
  • not accept the appointment, where it is known that a limitation will be placed on the scope of the audit.

Engagement letters

The engagement letter will be sent before the audit. It specifies the nature of the contract between the audit firm and the client and minimises the risk of any misunderstanding of the auditor's role.

It should be reviewed every year to ensure that it is up to date but does not need to be reissued every year unless there are changes to the terms of the engagement. The auditor must issue a new engagement letter if the scope or context of the assignment changes after initial appointment.

ISA 210 requires the auditor to consider whether there is a need to remind the entity of the existing terms of the audit engagement for recurring audits and many firms choose to send a new letter every year, to emphasise its importance to clients.

The contents of the engagement letter

The contents of a letter of engagement for audit services are listed in ISA 210 Agreeing the Terms of Audit Engagements. They should include the following:

  • The objective and scope of the audit;
  • The responsibilities of the auditor;
  • The responsibilities of management;
  • The identification of an applicable financial reporting framework; and
  • Reference to the expected form and content of any reports to be issued.

In addition to the above the engagement letter may also make reference to:

  • The unavoidable risk that some material misstatements may go undetected due to the inherent limitations in an audit;
  • Arrangements regarding the planning and performance of the audit;
  • The expectation that management will provide written representations;
  • The agreement of management to make available to the auditor draft financial statements and other information in time to complete the audit in accordance with the proposed timetable;
  • The agreement of management to inform the auditor of facts that may affect the financial statements;
  • The basis on which fees are computed and billing arrangements;
  • A request for management to acknowledge receipt of the engagement letter and to agree the terms outlined;
  • Agreements concerning the involvement of auditors experts and internal auditors; and
  • Restrictions to the auditor's liability.
Created at 10/3/2012 1:49 PM  by System Account  (GMT) Greenwich Mean Time : Dublin, Edinburgh, Lisbon, London
Last modified at 11/2/2016 11:27 AM  by System Account  (GMT) Greenwich Mean Time : Dublin, Edinburgh, Lisbon, London

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ACCAPEDIA - Accepting an Audit Engagement