ISA 210: Agreeing the Terms of Audit Engagements Flashcards
Which TWO main issues are discussed in ISA 210?
- Acceptance and Continuance Procedures before Accepting an audit client.
- Agreeing Terms of Engagement.
(Ref. ISA 210)
What are the Preconditions for Audit?
Preconditions = AFRF is acceptable + Management agrees on premise.
(Ref. ISA 210)
How auditor ensures that Preconditions for Audit are present?
- To determine whether AFRF is acceptable, consider:
- Nature of entity (e.g. profit oriented, not for profit, or public-sector entity)
- Nature of financial statements (e.g. complete set of financial statements, or single financial statement)
- Purpose of financial statements (e.g. prepared for wide range of users or for specific users).
- Whether law or regulation prescribes the AFRF (if prescribed, such framework is presumed to be acceptable unless there are indications of deficiencies).
- Obtain agreement that management acknowledges its responsibilities for F/S, internal control and to provide information to auditor.
(Ref. ISA 210)
What should auditor do if management does not agree on Premise?
- Don’t accept, unless required by law.
- Discuss importance and implication with management.
(Ref. ISA 210)
What should auditor do if management AFRF is not acceptable?
- Don’t accept, unless required by law.
- If required by law, accept only if 3 conditions are met i.e. Management provides additional disclosures, auditors includes EOM in report, opinion shall not include phrases “True and fair view” or “presented fairly in all material respects”, unless required by law.
- If conditions are also not met, auditor shall evaluate effect of misleading F/S on report and shall include reference of modification in report in terms of engagement.
(Ref. ISA 210)
What should auditor do if there is scope limitation before acceptance?
- If pervasive: don’t accept engagement unless required by law.
- If material: may accept but include reference of modification in report in terms of engagement.
(Ref. ISA 210)
How shall management describe AFRF if Financial reporting standards are supplemented by Law or Regulation?
- *If compliance with both can be done** without conflict (e.g. through additional disclosures)
1. Include additional disclosures.
2. Describe AFRF as “IFRS and requirements of Companies Act, 2017 of Pakistan”. - *If compliance with both cannot be done** due to conflicts:
1. Follow local laws or regulations.
2. Describe AFRF as “accounting and reporting standards as applicable in Pakistan and requirements of Companies Act, 2017”. (i.e. no compliance with AFRF)
(Ref. ISA 210)
Can auditor use audit report which prescribed by Law and is significantly different from ISAs?
- Yes, if additional explanation can mitigate understanding about assurance obtained from audit.
- Otherwise, do not statement compliance with ISAs in report.
(Ref. ISA 210)
Which terms of audit engagement MUST be agreed with client?
- The objective and scope of audit.
- The responsibilities of the auditor;
- The responsibilities of management;
- Identification of AFRF;
- Expected form and content of reports
- A statement that actual report may differ from expected form and content.
(Ref. ISA 210)
Shall auditor include terms in Engagement Letter if law or regulation also prescribe them?
Not. However, management’s responsibilities shall still be included.
(Ref. ISA 210)
Which terms of audit engagement MAY be included?
- Elaboration of scope of the audit.
- Form of other communications (e.g. Letter of Weakness).
- Requirement for auditor to communicate key audit matter
- Existence of inherent limitations of an audit
- Arrangements regarding the planning and performance of the audit.
- Expectation to provide F/S, written representations, subsequent events, and other relevant information.
- Fee or Basis of fee and billing arrangement.
(Ref. ISA 210)
Which terms of audit engagement MUST be included when RELEVANT?
- Involvement of component auditor.
- Involvement of experts.
- Involvement of internal auditor.
- Involvement of predecessor auditor.
- Obligations to provide working papers to other parties.
- Any further agreements between auditor and the entity.
(Ref. ISA 210)
Is it necessary to issue separate engagement letter in each year to client?
No. It depends on:
- Any indication that client misunderstands the objective and scope of the audit.
- A recent change in senior management.
- A significant change in ownership.
- A change in legal or regulatory requirements.
- A significant change in nature or size of entity’s business.
- A change in applicable financial reporting framework of entity.
- A change in other reporting requirements
- Any revised or special terms of the audit engagement.
(Ref. ISA 210)
Is it necessary to issue separate engagement letter to each component of client?
No. It depends on:
- Legal requirements.
- Who appoints auditor of component.
- Degree of ownership by parent
- Degree of independence of component management.
- Whether a separate report is to be issued on component.
(Ref. ISA 210)
Can auditor change terms of engagement if requested by management during audit:
Yes, if there is a reasonable justification.
Reasonable Justification:
- A change in circumstances affecting need for the service
- A misunderstanding as to nature of the service
No Reasonable Justification:
- If there is incorrect, incomplete or unsatisfactory information.
(Ref. ISA 210)
