3043 Agreement on audit engagement terms

Apr-2018

CAS Guidance

The roles of management and those charged with governance in agreeing the terms of the audit engagement for the entity depend on the governance structure of the entity and relevant law or regulation (CAS 210.A22).

It is in the interests of both the entity and the auditor that the auditor sends an audit engagement letter before the commencement of the audit to help avoid misunderstandings with respect to the audit. In some countries, however, the objective and scope of an audit and the responsibilities of management and of the auditor may be sufficiently established by law, that is, they prescribe the matters described in paragraph 10. Although in these circumstances paragraph 11 permits the auditor to include in the engagement letter only reference to the fact that relevant law or regulation applies and that management acknowledges and understands its responsibilities as set out in paragraph 6(b), the auditor may nevertheless consider it appropriate to include the matters described in paragraph 10 in an engagement letter for the information of management (CAS 210.A23).

The form and content of the audit engagement letter may vary for each entity. Information included in the audit engagement letter on the auditor’s responsibilities may be based on CAS 200. Paragraphs 6(b) and 12 of this CAS deal with the description of the responsibilities of management. In addition to including the matters required by paragraph 10, an audit engagement letter may make reference to, for example (CAS 210.A24):

• Elaboration of the scope of the audit, including reference to applicable legislation, regulations, CASs, and ethical and other pronouncements of professional bodies to which the auditor adheres.

• The form of any other communication of results of the audit engagement.

• The requirement for the auditor to communicate key audit matters in the auditor’s report in accordance with CAS 701.

• The fact that because of the inherent limitations of an audit, together with the inherent limitations of internal control, there is an unavoidable risk that some material misstatements may not be detected, even though the audit is properly planned and performed in accordance with CASs.

• Arrangements regarding the planning and performance of the audit, including the composition of the audit team.

• The expectation that management will provide written representations (see also paragraph A13).

• The expectation that management will provide access to all information of which management is aware that is relevant to the preparation of the financial statements, including an expectation that management will provide access to information relevant to disclosures.

• The agreement of management to make available to the auditor draft financial statements, including all information relevant to their preparation, whether obtained from within or outside of the general and subsidiary ledgers (including all information relevant to the preparation of disclosures), and the other information, if any, in time to allow the auditor to complete the audit in accordance with the proposed timetable.

• The agreement of management to inform the auditor of facts that may affect the financial statements, of which management may become aware during the period from the date of the auditor’s report to the date the financial statements are issued.

• The basis on which fees are computed and any billing arrangements.

• A request for management to acknowledge receipt of the audit engagement letter and to agree to the terms of the engagement outlined therein.

When the auditor is not required to communicate key audit matters, it may be helpful for the auditor to make reference in the terms of the audit engagement to the possibility of communicating key audit matters in the auditor’s report and, in certain jurisdictions, it may be necessary for the auditor to include a reference to such possibility in order to retain the ability to do so (CAS 210.A25).

When relevant, the following points could also be made in the audit engagement letter (CAS 210.A26):

• Arrangements concerning the involvement of other auditors and experts in some aspects of the audit.

• Arrangements concerning the involvement of internal auditors and other staff of the entity.

• Arrangements to be made with the predecessor auditor, if any, in the case of an initial audit.

• A reference to, and description of, the auditor’s responsibilities under law, regulation or relevant ethical requirements that address reporting identified or suspected non-compliance with laws and regulations to an appropriate authority outside the entity.

• Any restriction of the auditor’s liability when such possibility exists.

• A reference to any further agreements between the auditor and the entity.

• Any obligations to provide audit working papers to other parties.

When the auditor of a parent entity is also the auditor of a component, the factors that may influence the decision whether to send a separate audit engagement letter to the component include the following (CAS 210.A27):

• who appoints the component auditor;
• whether a separate auditor’s report is to be issued on the component;
• legal requirements in relation to audit appointments;
• degree of ownership by parent; and
• degree of independence of the component management from the parent entity.

CAS Guidance

If, in the circumstances described in paragraphs A23 and A29, the auditor concludes that it is not necessary to record certain terms of the audit engagement in an audit engagement letter, the auditor is still required by paragraph 11 to seek the written agreement from management that it acknowledges and understands that it has the responsibilities set out in paragraph 6(b). However, in accordance with paragraph 12, such written agreement may use the wording of the law or regulation if such law or regulation establishes responsibilities for management that are equivalent in effect to those described in paragraph 6(b). The accounting profession, audit standards setter, or audit regulator in a jurisdiction may have provided guidance as to whether the description in law or regulation is equivalent (CAS 210.A28).

CAS Guidance

Law or regulation governing the operations of public sector audits generally mandate the appointment of a public sector auditor and commonly set out the public sector auditor’s responsibilities and powers, including the power to access an entity’s records and other information. When law or regulation prescribes in sufficient detail the terms of the audit engagement, the public sector auditor may nonetheless consider that there are benefits in issuing a fuller audit engagement letter than permitted by paragraph 11 (CAS 210.A29).