Objective of SA 210
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:
a) Establishing whether the preconditions for an audit are present; and
b) Confirming that there is a common understanding between the auditor and management and, where appropriate, those charged with governance of the terms of the audit engagement.
Preconditions for an Audit
In order to establish whether the preconditions for an audit are present, the auditor shall:
Determine whether the financial reporting framework to be applied in the preparation of the financial statements is acceptable; and Obtain the agreement of management that it acknowledges and understands its 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; and
c) To provide 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.
Note:- If the preconditions for an audit are not present, the auditor shall discuss the matter with management and the auditor shall not accept the proposed audit engagement
Exception to above :- Financial Reporting Framework Prescribed by Law or Regulation
If the auditor has determined that the financial reporting framework prescribed by law or regulation would be unacceptable but for the fact that it is prescribed by law or regulation, the auditor shall accept the audit engagement only if the following conditions are present:
1) Management agrees to provide additional disclosures in the financial statements required to avoid the financial statements being misleading; and
2) It is recognised in the terms of the audit engagement that:
– The auditor’s report on the financial statements will incorporate an Emphasis of Matter paragraph, drawing users’ attention to the additional disclosures, in accordance with SA 706 ; and
– Unless the auditor is required by law or regulation to express the auditor’s opinion on the financial statements by using the phrases “present fairly, in all material respects”, or “give a true and fair view” in accordance with the applicable financial reporting framework, the auditor’s opinion on the financial statements will not include such phrases.
Agreement on Audit Engagement Terms
1) The auditor shall agree the terms of the audit engagement with management or those charged with governance, as appropriate.
2) The agreed terms of the audit engagement shall be recorded in an audit engagement letter or other suitable form of written agreement and shall include:
a) The objective and scope of the audit of the financial statements;
b) The responsibilities of the auditor;
c) The responsibilities of management;
d) Identification of the applicable financial reporting framework for the preparation of the financial statements; and
e) 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.
Note:- If law or regulation prescribes in sufficient detail the above terms of the audit engagement, the auditor need not record them in a written agreement, provided that such law or regulation applies and that management acknowledges and understands its responsibilities.
Recurring Audits
The auditor may decide not to send a new audit engagement letter or other written agreement each period. However, the following factors may make it appropriate to revise the terms of the audit engagement or to remind the entity of existing terms:
1) Any indication that the entity misunderstands the objective and scope of the audit.
2) Any revised or special terms of the audit engagement.
3) A recent change of senior management.
4) A significant change in ownership.
5) A significant change in nature or size of the entity’s business.
6) A change in legal or regulatory requirements.
7) A change in the financial reporting framework adopted in the preparation of the financial statements.
8) A change in other reporting requirements.
Acceptance of a Change in the Terms of the Audit Engagement
1) The auditor shall not agree to a change in the terms of the audit engagement where there is no reasonable justification for doing so.
2) 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.
3) 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.
4) 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:
a) Withdraw from the audit engagement where possible under applicable law or regulation; and
b) 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.
Limitation on Scope Prior to Audit Engagement Acceptance
If management or those charged with governance impose 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.
Format of Audit Report prescribed by Law or RegulationYour Attractive Heading
In some cases, the law or regulation applicable to the entity prescribes the layout or wording of the auditor’s report in a form or in terms that are significantly different from the requirements of SAs. In these circumstances, the auditor shall evaluate:
a) Whether users might misunderstand the assurance obtained from the audit of the financial statements and, if so,
b) Whether additional explanation in the auditor’s report can mitigate possible misunderstanding.
If the auditor concludes that additional explanation in the auditor’s report cannot mitigate possible misunderstanding, the auditor shall not accept the audit engagement, unless required by law or regulation to do so.
An audit conducted in accordance with such law or regulation does not comply with SAs. Accordingly, the auditor shall not include any reference within the auditor’s report to the audit having been conducted in accordance with SAs