8. Engagement Letter

Question 1

What are the preconditions for audit?

Answer 1

Preconditions for audit means:
AFRF used by the management in preparation of financial statements is acceptable.
Management agrees to the premise on which the audit is conducted.

Question 2

How does the auditor know that the preconditions are present or not?

Answer 2

Auditor shall determine whether financial reporting framework adopted by management is acceptable.
Auditor shall obtain agreement from management that it understands and acknowledges its responsibilities:
for prep and presentation of financial information
for internal controls which are necessary for prep of financial statements free from material misstatement.
to provide auditor with all relevant or additional info and unrestricted access to personnel.

Question 3

What should the auditor do if the preconditions are not present?

Answer 3

Then he shall explain to the management,
what preconditions are
preconditions are necessary to comply with ISAs
they are necessary to avoid misunderstandings about responsibilities of management and auditor.

Question 4

What to do if AFRF is not acceptable?

Answer 4

Auditor shall refuse the engagement unless required by law.
If AFRF is not acceptable but required by law, auditor shall accept the engagement only if following conditions are met:
Management agrees to provide additional disclosure in financial statement.
Engagement letter shall state that auditor report will include emphasis of matter paragraph and will not state that it gives true and fair view.

Question 5

If AFRF is not acceptable but required by law and conditions are not met then what should be the auditor’s course of action be?

Answer 5

If the conditions are not met and the auditor is required by law to undertake audit engagement, that auditor may still accept the engagement but:
Evaluate its effect on auditor’s report AND
Include appropriate reference of effect in engagement letter.

Question 6

What is engagement letter?

Answer 6

It is a written agreement between auditor and client on terms and conditions of audit engagement.

Question 7

What are the contents of engagement letter?

Answer 7

The audit engagement letter shall include:
the purpose and scope of audit, identification of AFRF, the responsibilities of auditor and management, reference to expected form and contents to be issued by auditor.

Question 8

What important matters may be included in the audit engagement letter?

Answer 8

1. scope of audit
2. inherent limitations of audit and internal control system of client.
3. arrangements regarding planning and performing the audit.
4. fee or basis of fee.
5. informing the auditor about significant events

Question 9

On what conditions is it necessary for the auditor to send engagement letter in case of recurring audit?

Answer 9

For example:

1. any indication that client misunderstands the scope of audit
2. recent change in senior management
3. significant change in ownership
4. change in legal requirements
5. nature and size of entity’s business

Question 10

What are the circumstances which lead to change in terms of audit engagement?

Answer 10

Management may request the auditor to change terms of audit engagement as a result of:
a change in circumstances affecting need for audit engagement
misunderstanding as to nature of service originally requested
a restriction on scope of audit engagement by management

Question 11

What are the factors to be considered before accepting changes in terms of engagement?

Answer 11

If management requests the auditor to change terms of engagement during engagement, auditor shall consider whether there is a reasonable justification to do so.
For Example:
A change in circumstances that affect the need for the service OR misunderstanding as to nature of service originally requested.
A change may not be reasonable if it relates to information that is incorrect or incomplete.

Question 12

What to do when a change is reasonable and auditor accepts the change?

Answer 12

1. Revised terms of engagement shall be agreed.
2. Procedures to be performed and Report to be issued shall be according to the revised engagement.
3. Report shall not refer to:
   original audit engagement
   any procedures performed in original audit engagement.

Question 13

What if change is not reasonable and auditor does not accept the change?

Answer 13

1. Auditor shall continue to perform the audit engagement as per original terms of engagement.
2. If management do not permit the auditor to perform original engagement, it will be scope limitation. Auditor shall withdraw from the engagement.
3. If withdrawal is not possible, auditor shall express disclaimer of opinion.