Chapter 1 General provisions Article 1 This standard is prepared in accordance with the General Independent Auditing Standard to establish

standards for the preparation of audit engagement letters and to define their contents. Article 2 The term "audit engagement letter" in this standard refers to a written contract entered into by the accounting firm and the client. Its purpose is to confirm the relationship between the client engaging the auditor and the accounting firm accepting the audit engagement and to define matters such as the objectives of the engagement, the scope of the audit, the responsibilities and duties of each party etc. The audit engagement letter has statutory binding force. Article 3 The term "the client" in this standard refers to the entity or individual who engages the accounting firm and signs the audit engagement letter with the accounting firm. Article 4 Certified Public Accountants ("CPAs") may refer to this standard in performing accounting advisory or accounting service engagements. Chapter 2 General principles Article 5 When accepting an audit engagement, the accounting firm should consider its own competence and ability to maintain independence. The accounting firm should sign an audit engagement letter with the client in accordance with the requirements of this standard. Article 6 Before signing an audit engagement letter, the accounting firm should appoint its CPA to investigate the entity's background and make a preliminary assessment of the audit risk. The CPA and the client should discuss matters regarding the engagement and should reach a consensus. Article 7 The CPA should understand the following background matters in relation to the entity: (1) the nature of the business, size and organisational structure; (2) the operating conditions and operating risk; (3) the audit results in previous years; (4) the structure and Organisation of the financial accounting function; and (5) other matters relevant to the audit engagement letter. Article 8 The audit engagement letter should be signed by the legal representatives, or their authorised representatives, of both the accounting firm and the client. The letter should also be stamped with both the client's chop and the accounting firm's chop. Article 9 If either the accounting firm or the client needs to modify or supplement the audit engagement letter, they should, by appropriate means, obtain consent from the other party first. Article 10 The CPA should file the audit engagement letter in the audit file.

Chapter 3 The contents of an audit engagement letter Article 11 The audit engagement letter should include the following basic contents: (1) the names of both parties; (2) the objectives of the engagement; (3) the scope of the audit; (4) the accounting responsibility and the audit responsibility; (5) the duties of both parties; (6) the deadline for the issuance of the audit report; (7) the responsibility arising from the use of the audit report; (8) the audit fees; (9) the period for which the audit engagement letter is valid; (10) the responsibility arising from a violation in the terms of the audit engagement letter; (11) the date of signing the audit engagement letter; and (12) other matters which both parties consider need to be included in the audit engagement letter. Article 12 The audit engagement letter should clearly define the accounting responsibility and the audit responsibility. It is the entity's accounting responsibility to establish a sound internal control system, to safeguard the assets and to ensure the truthfulness, legitimacy and completeness of the accounting information. It is the CPA's audit responsibility to issue an audit report in accordance with the requirements of the Independent Auditing Standards and to ensure the truthfulness and legitimacy of the audit report. The audit responsibility cannot substitute, alleviate or eliminate the accounting responsibility. Article 13 The audit engagement letter should clearly define the duties of both parties. (1) The major duties that should be fulfilled by the client include: (i) the provision of all information required by the CPA on a timely basis; (ii) the provision of the necessary working environment and cooperation with the CPA during the audit; and (iii) the full and timely settlement of the audit fees in accordance with the agreed terms. (2) The major duties that should be fulfilled by the accounting firm include: (i) the completion of the audit and the issuance of the audit report in accordance with the time schedule as agreed; and (ii) keeping business information acquired in the course of the audit confidential. Article 14 The audit engagement letter should clearly define the basis on which the audit fees are computed and the payment methods and schedule.

Article 15 The audit engagement letter should clearly state that it is the client's responsibility to ensure the proper use of the audit report. Any consequences arising from the improper use of the audit report are not the responsibility of the CPA or his accounting firm. Chapter 4 Supplementary provisions Article 16 The Chinese Institute of Certified Public Accountants is responsible for the interpretation of this standard. Article 17 This standard takes effect from 1 January 1996.

Specific Independent Auditing Standard No. 2 Audit Engagement Letters Chapter 1 General provisions Article 1 This standard is prepared in accordance with the General Independent Auditing Standard to establish standards for the preparation of audit engagement letters and to define their contents. Article 2 The term "audit engagement letter" in this standard refers to a written contract entered into by the accounting firm and the client. Its purpose is to confirm the relationship between the client engaging the auditor and the accounting firm accepting the audit engagement and to define matters such as the objectives of the engagement, the scope of the audit, the responsibilities and duties of each party etc. The audit engagement letter has statutory binding force. Article 3 The term "the client" in this standard refers to the entity or individual who engages the accounting firm and signs the audit engagement letter with the accounting firm. Article 4 Certified Public Accountants ("CPAs") may refer to this standard in performing accounting advisory or accounting service engagements. Chapter 2 General principles Article 5 When accepting an audit engagement, the accounting firm should consider its own competence and ability to maintain independence. The accounting firm should sign an audit engagement letter with the client in accordance with the requirements of this standard. Article 6 Before signing an audit engagement letter, the accounting firm should appoint its CPA to investigate the entity's background and make a preliminary assessment of the audit risk. The CPA and the client should discuss matters regarding the engagement and should reach a consensus. Article 7 The CPA should understand the following background matters in relation to the entity: (1) the nature of the business, size and organisational structure;

(2) the operating conditions and operating risk; (3) the audit results in previous years; (4) the structure and Organisation of the financial accounting function; and (5) other matters relevant to the audit engagement letter. Article 8 The audit engagement letter should be signed by the legal representatives, or their authorised representatives, of both the accounting firm and the client. The letter should also be stamped with both the client's chop and the accounting firm's chop. Article 9 If either the accounting firm or the client needs to modify or supplement the audit engagement letter, they should, by appropriate means, obtain consent from the other party first. Article 10 The CPA should file the audit engagement letter in the audit file. Chapter 3 The contents of an audit engagement letter Article 11 The audit engagement letter should include the following basic contents: (1) the names of both parties; (2) the objectives of the engagement; (3) the scope of the audit; (4) the accounting responsibility and the audit responsibility; (5) the duties of both parties; (6) the deadline for the issuance of the audit report; (7) the responsibility arising from the use of the audit report; (8) the audit fees; (9) the period for which the audit engagement letter is valid; (10) the responsibility arising from a violation in the terms of the audit engagement letter; (11) the date of signing the audit engagement letter; and (12) other matters which both parties consider need to be included in the audit engagement letter. Article 12 The audit engagement letter should clearly define the accounting responsibility and the audit responsibility. It is the entity's accounting responsibility to establish a sound internal control system, to safeguard the assets and to ensure the truthfulness, legitimacy and completeness of the accounting information. It is the CPA's audit responsibility to issue an audit report in accordance with the requirements of the Independent Auditing Standards and to ensure the truthfulness and legitimacy of the audit report. The audit responsibility cannot substitute, alleviate or eliminate the accounting responsibility. Article 13 The audit engagement letter should clearly define the duties of both parties. (1) The major duties that should be fulfilled by the client include:

(i) the provision of all information required by the CPA on a timely basis; (ii) the provision of the necessary working environment and cooperation with the CPA during the audit; and (iii) the full and timely settlement of the audit fees in accordance with the agreed terms. (2) The major duties that should be fulfilled by the accounting firm include: (i) the completion of the audit and the issuance of the audit report in accordance with the time schedule as agreed; and (ii) keeping business information acquired in the course of the audit confidential. Article 14 The audit engagement letter should clearly define the basis on which the audit fees are computed and the payment methods and schedule. Article 15 The audit engagement letter should clearly state that it is the client's responsibility to ensure the proper use of the audit report. Any consequences arising from the improper use of the audit report are not the responsibility of the CPA or his accounting firm. Chapter 4 Supplementary provisions Article 16 The Chinese Institute of Certified Public Accountants is responsible for the interpretation of this standard. Article 17 This standard takes effect from 1 January 1996. CHANGE IN STATUS FOR GAAS One of the most basic changes being made in the clarified standards is the status of the 10 basic rules traditionally known as the generally accepted auditing standards (GAAS) contained in current AU section 150. Auditors have traditionally classified these 10 standards into three groups: general, fieldwork and reporting. Through the Clarity Project, the requirements included in the 10 standards have been incorporated into various clarified standards. To provide a framework that is helpful in understanding and explaining an audit, the 10 standards will form the basis for clarified principles that, while still broadly applicable, will not carry any authority but rather provide a framework that is helpful in understanding and explaining an audit. These clarified principles are presented in the Preface of the clarified standards, included with the clarified SAS, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with GAAS.