- 10 Marks
AA – L2 – Q6 – Audit Engagement
Question
Engagement letters
Required
(a) Explain the objectives of the auditor in agreeing the terms of an audit engagement for Zenith Enterprises.
(b) Set out the main components of an engagement letter for Zenith Enterprises.
Answer
(a) The objective of the auditor, per ISA 210 Agreeing the Terms of Audit Engagements, is to accept or continue an audit engagement only when the basis upon which it is to be performed has been agreed. This is done by:
- establishing whether the preconditions for an audit are present; and
- confirming that there is a common understanding between the auditor and management.
When a new engagement letter should be sent to an existing client, ISA 210 suggests that the following factors may indicate that the issue of a revised engagement letter is appropriate:
- Any indication that the entity misunderstands the objective and scope of the audit.
- Any revised or special terms of the audit engagement.
- A recent change of senior management.
- A significant change in ownership.
- A significant change in nature or size of the entity’s business.
- A change in legal or regulatory requirements.
- A change in the financial reporting framework adopted in the preparation of the financial statements.
- A change in other reporting requirements.
(b) An engagement letter shall include reference to the following:
- The objective and scope of the audit.
- The responsibilities of the auditor.
- The responsibilities of management.
- Identification of the underlying financial reporting framework.
- Reference to the expected form and content of any reports to be issued.
In addition to the above, the auditor may feel that it is appropriate to include additional points, such as:
- More details on the scope of the audit, such as reference to applicable legislation, regulations, ISAs, and ethical pronouncements.
- The fact that because of the inherent limitations of an audit, and the inherent limitations of internal control, there is an unavoidable risk that some material misstatements may not be detected even though the audit was properly planned and performed in accordance with ISAs.
- Arrangements regarding the planning and performance of the audit, including the composition of the audit team.
- The expectation that management will provide written representations.
- The basis on which fees are computed and any billing arrangements.
- A request for management to acknowledge receipt of the engagement letter and to agree to its terms.
- Arrangements concerning the involvement of other auditors, experts, or internal auditors (or other staff of the entity).
- Any restriction of the auditor’s liability when such possibility exists.
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