Terms of Engagement

Question 1

Objective

Answer 1

Accept a new or existing audit client only when the basis upon which it is to be performed has been agreed upon through

1. establishing whether the preconditions for an audit are present
2. confirming that a common understanding of the terms of the audit engagement exists between the auditor and management and, when appropriate, those charged with goverance

Question 2

Define Preconditions for an Audit

Answer 2

the use by management of an acceptable financial reporting framework in the preparation of the financial statements and the agreement of management to the premise of which an audit is conducted

Question 3

Auditors Responsibility regarding preconditions of an audit

Answer 3

1. Determine whether the financial reporting framework is acceptable
2. obtain the agreement from management it acknowledges and understands its responsibilities

Question 4

Managements Responsibilities regarding preconditions for an audit

Answer 4

Audit should obtain an agreement of management that it acknowledges and understands it responsibilities for:

1. the preparation and fair presentation of the financial statements
2. the design and implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error
3. provide the audit with
   - access to all information of which management is aware that is relevant to the preparation and fair presentation of the financial statements
   - additional information that the auditor may request from management
   - unrestricted access to persons within the entity relevant to obtaining audit evidence

Question 5

Actions taken by auditor if Management Imposed limitation on scope prior to audit engagement acceptance that would result in disclaimer of opinion. 2 scenarios (required and not required by law)

Answer 5

Not required: not accept a limited engagement

Required: accept limited engagement if disclaimer of opinion is allowed

Question 6

Terms of an Engagement Letter

Answer 6

1. the objective and scope of the audit of the FS
2. the responsibilities of the auditor
3. responsibilities of management
4. a statement explaining the inherent limitations of an audit
5. identification of the applicable financial reporting framework
6. reference to the expected form and content of any reports to be issued.

Question 7

Initial Audits: 5 matters to address with predecessor

Answer 7

• Information that might bear on the integrity of management
• Any disagreements with management about accounting or audit issues
• Communications involving those charged with governance with respect to fraud and/or noncompliance with applicable laws or regulations
• Communications involving management and those charged with governance regarding significant deficiencies in internal controls
• The predecessors understanding about the reason for the entity’s change in auditors.

Question 8

Factors in determining the acceptability of the financial reporting framework

Answer 8

1. nature of the entity
2. the purpose of the financial statements
3. the nature of the financial statements
4. whether law or regulation prescribes the applicable financial reporting framework