Engagement Letter Precondition of Audit

Preconditions for an audit

ISA 210 Agreeing with the Terms of Audit Engagements provides steerage to auditors on the steps they must absorb acceptive a brand new audit or continued on AN existing audit engagement. It sets out a variety of processes that the auditor ought to perform together with agreeing on whether or not the preconditions square measure gift, agreement of audit terms in AN engagement letter, continual audits, and changes in engagement terms.

Preconditions for an Audit

1. Determine whether the financial reporting standers to be applied in the preparation of the financial statements is acceptable or not.

2. Obtain the agreement with management that it acknowledges and understands its responsibility to auditors:

a. Access is aware that is relevant to the preparation of the financial statements such as accounting records, documentation, and other matters needs;

b. other information that the auditor may require from management for the purpose of the audit*; and

c. Unrestricted access to records within the entity from whom the auditor determines it necessary to obtain the sufficient audit evidence

Agreeing to the terms of engagement

Engagement letter ( compulsory for every new engagement  before the audit starts)

Purpose of an engagement letter

An engagement letter provides a written agreement of the terms and conditions of the audit engagement between the auditor and client or TCWG.

Contents of an engagement letter

Generally, an audit engagement letter contains the following matters:

1. The objective of the audit: e.g. statutory audit OR internal audit

2. Scope of the audit: explain the scope of the audit, as well as a reference to applicable law & regulations, ISAs, and ethical rules, and other pronouncements of professional bodies to which the auditor adheres.

3. Identification of the applicable financial reporting framework: e.g. International Financial Reporting Standers or US GAAP

4. Time schedule: estimated time needed for completion of the audit

5. The requirement for the auditor to convey key audit matters in the auditor report in accordance with ISA 701

6. Deliverables: The form of any other communication of results of the audit engagement. e.g., certificates or audit reports.

7. The expectation that the client will provide written representations

8. The basis on which fees will be charged and any billing arrangements.

9. Permission to communicate with the previous accountant’s records

10. Access to all the records, documentation, and other information needed in connection with the auditing.

11. Management’s responsibility for needed and maintaining effective internal controls

13. Arrangements regarding the performance of the audit, including the composition of the engagement team during an audit.

14. The expectation that management will provide access to all information of which auditor needed to perform an audit of financial statements,

15. The agreement of management to make available all information to the auditor draft financial statements including all information relevant to their preparation of financial statements,

16. The agreement of the management bt auditor with the auditor to inform the auditor of facts that may affect the financial statements by errors.

Changes to engagement letters

Engagement letters should be revised for recurring/existing clients should be revised if any of the following factors are present:

– Any indication that the entity miscalculates the objective and scope.

– Any revised or special terms of the audit engagement need to add, as these would require inclusion in the letter.

– A recent change of senior staff or significant change in owners. The letter is signed by a director on behalf of those charged with governance that needs to change; if there have been significant changes in management they need to audit the engagement letter includes.

– A significant change in the nature or size of the entity’s terms.

– A change in legal or by law requirements. An engagement letter is a contract with the client hence if legal or regulatory changes occur, then the contract could be out of date &need to change.

– A change in the financial reporting standers adopted in the preparation of the financial statements. The engagement letter the role of auditors and those charged with governance, the reporting framework of the financial statements, and if these changes, then the letter requires updating.

– A change in other reporting standers. Other reporting criteria may be stipulated in the engagement letter; hence if these changes, the letter should be changed.

Read More: Assurance Engagement

Find Us on Facebook