ISAs – Summaries and Application Guide ISA 210

ISA 210
AGREEING THE TERMS OF AUDIT
ENGAGEMENTS

LO # LEARNING OBJECTIVE

PART A – ACCEPTANCE AND CONTINANUCE PROCEDURES

LO 1 PRECONDITIONS FOR AN AUDIT
LO 2 SCOPE LIMITATION BEFORE ACCEPTANCE
LO 3 ADDITIONAL CONSIDERATIONS IN ENGAGEMENT ACCEPTANCE
PART B – AGREEING TERMS OF ENGAGEMENT
LO 4 TERMS OF AUDIT ENGAGEMENT
LO 5 AGREEING TERMS ON RECURRING AUDIT AND COMPONENT AUDIT
LO 6 ACCEPTANCE OF A CHANGE IN THE TERMS OF THE AUDIT ENGAGEMENT
APPENDIX:
APX DETERMINING THE ACCEPTABILITY OF AFRF

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ISAs – Summaries and Application Guide ISA 210

PART A – ACCEPTANCE AND CONTINANUCE PROCEDURES

LO 1: PRECONDITIONS FOR AN AUDIT:

What are Preconditions for audit:
Preconditions for an audit means:
1. AFRF used by management in preparation of financial statements is acceptable.
2. Management (and TCWG where applicable) agrees to the premise on which an audit is
conducted.

How auditor establishes whether Preconditions for Audit are present/exist:

1. Auditor shall determine whether financial reporting framework adopted by management in
preparation of financial statements is acceptable considering nature of entity, nature of
financial statements, purpose of financial statements, and legal requirements.
2. Auditor shall obtain agreement from management (via engagement letter) that it understands
and acknowledges its responsibilities:
a. for preparation and presentation of financial statements.
b. for such internal control which management and TCWG determine necessary for
preparation of financial statements that are free from material misstatement; and
c. to provide the auditor all relevant information; additional information (e.g. Other
Information); and unrestricted access to personnel.

Course of Action if any of Preconditions for audit is NOT present:

Auditor should discuss the necessity of preconditions with management.

If management does not agree to premise on which audit is conducted:

Auditor shall not accept the proposed audit engagement.

If AFRF is not acceptable:

Auditor shall not accept the engagement unless AFRF is required by law.

If AFRF is not acceptable but is required by law, financial statements are misleading. Auditor shall
accept engagement if following conditions are met:
 Management provides additional disclosures to avoid financial statements being
misleading.
 It is stated in terms of the engagement that:
o Audit report shall include Emphasis of Matter paragraph to draw users’ attention to
additional disclosures.
o Auditor’s opinion shall not include phrases “True and fair view” or “presented fairly
in all material respects”, unless these phrases are required by law.

If above conditions are not met and auditor is required by law to conduct audit, auditor shall:
 Evaluate effect of misleading financial statements on audit report.
 Include reference of this matter in terms of engagement.

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ISAs – Summaries and Application Guide ISA 210

LO 2: SCOPE LIMITATION BEFORE ACCEPTANCE:

If before acceptance, there is a scope limitation by management whose effect is pervasive (e.g. not
allowing to communicate to predecessor auditor), auditor shall not accept proposed audit
engagement, unless required by law or regulation to do so.

LO 3: ADDITIONAL CONSIDERATIONS IN ENGAGEMENT ACCEPTANCE:

Financial reporting standards supplemented by Law or Regulation:
If local laws or regulations (e.g. Companies Act 2017) supplement Financial Reporting Standards
(e.g. IFRS), management will comply both unless they are in conflict.

If compliance with both can be met through additional disclosures (or narrowing choice):
1. Management shall include additional disclosures in financial statements, or shall narrow
choice.
2. Both will be mentioned as AFRF e.g. “International Financial Reporting Standards and
requirements of Companies Act, 2017 of Pakistan”.

If compliance with both cannot be met through additional disclosures (or narrowing choice):
1. Management shall amend description of AFRF e.g. “accounting and reporting standards as
applicable in Pakistan and requirements of Companies Act, 2017”.

Auditor can still audit the financial statements in both cases after ensuring that AFRF is acceptable.

Auditor’s report prescribed by Law or Regulation:

If layout/wording of local audit report is significantly different from ISAs (particularly opinion),
auditor shall evaluate whether users may misunderstand assurance obtained from audit and
whether additional explanation in auditor’s report can mitigate this misunderstanding.

If additional explanation cannot mitigate misunderstanding:

 If engagement is not required by law, auditor shall not accept audit engagement.
 If engagement is required by law, auditor shall not state compliance with ISAs in report.

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ISAs – Summaries and Application Guide ISA 210

PART B – AGREEING TERMS OF ENGAGEMENT

LO 4: TERMS OF AUDIT ENGAGEMENT:

Auditor shall agree (in an audit engagement letter or other form of written agreement) following
terms of audit engagement with management or TCWG:
a) The objective and scope of audit.
b) The responsibilities of the auditor;
c) The responsibilities of management;
d) Identification of the applicable financial reporting framework;
e) Reference to expected form and content of any reports to be issued by auditor
f) A statement that there may be circumstances in which a report may differ from its expected
form and content.

Terms Prescribed by Law

If law or regulation prescribes these terms in sufficient details, auditor need not include them in
engagement letter and may state that such law or regulation applies. However, management’s
responsibilities shall be included in engagement letter even if specified by law (same wordings may be
used as specified by law if effect is equivalent).

An audit engagement letter may also include following:

a) Elaboration of the scope of the audit.
b) Form of any other communication as a result of the audit engagement (e.g. Letter of
Weakness).
c) Requirement for auditor to communicate key audit matter
d) Fact that there may be undetected material misstatements due to inherent limitations of an
audit
e) Arrangements regarding the planning and performance of the audit, including composition
of the engagement team.
f) The expectation that management will provide written representations, and access to all
relevant information.
g) The expectation that management will provide draft financial statements and other
information on timely basis.
h) Fee or Basis of fee and billing arrangement.
i) Agreement of management to inform the auditor of subsequent events affecting financial
statements (after the date of auditor’s report).

An audit engagement letter shall also include following when relevant:

a) Arrangements concerning involvement of component auditor and experts in some aspects
of audit.
b) Arrangements concerning involvement of internal auditor.
c) Arrangements concerning involvement of predecessor auditor.
d) Reference to any further agreements between auditor and the entity.
e) Obligations to provide audit working papers to other parties.
f) Restriction of auditor’s liability (if such possibility exists)

It is better to agree terms before commencement of audit.

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ISAs – Summaries and Application Guide ISA 210

LO 5: AGREEING TERMS ON RECURRING AUDIT AND COMPONENT AUDIT:

Recurring Audit:
Auditor may decide not to send a new audit engagement letter each period. However, it should be
sent again on recurring audit to revise or remind management of existing terms of engagement
when there is change in circumstances e.g.
1) Any indication that client misunderstands the objective and scope of the audit.
2) A recent change in senior management.
3) A significant change in ownership.
4) A change in legal or regulatory requirements.
5) A significant change in nature or size of entity’s business.
6) A change in applicable financial reporting framework of entity.
7) A change in other reporting requirements
8) Any revised or special terms of the audit engagement.

Audit of Components:
If auditor of parent entity is also the auditor of component, auditor shall consider following factors
to determine whether a separate engagement letter is to be sent to component:
1. Legal requirements.
2. Who appoints auditor of component.
3. Whether a separate report is to be issued on component.
4. Degree of independence of component management, and Degree of ownership by parent.

LO 6: ACCEPTANCE OF A CHANGE IN THE TERMS OF THE AUDIT ENGAGEMENT:

If management requests to change the terms of Engagement:
Factors to consider:
Auditor shall consider whether there is a reasonable justification to do so.

A change in circumstances that affects the need for the service or a misunderstanding as to nature
of the service originally requested may be a reasonable justification. In contrast, a change may not
be reasonable if it relates to information that is incorrect, incomplete or otherwise unsatisfactory.

If there is Reasonable Justification:

Auditor shall agree revised terms of engagement.

If management requests to change Audit Engagement to Review or Related Services:

Factors to consider:
Auditor shall consider:
 whether there is a reasonable justification to do so (as discussed above), and
 any legal or contractual implications for the change.

If there is Reasonable Justification:

If audit engagement is changed to Review or Related services:
1. Procedures to be performed and Report to be issued shall be according to revised
engagement (already performed work may still be relevant).
2. Report shall NOT refer to original audit engagement or any procedures performed in
original audit engagement (except agreed-upon procedures).

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ISAs – Summaries and Application Guide ISA 210

If there is NO Reasonable Justification:

Auditor shall continue to perform the audit engagement as per original terms of engagement.

If management does not permit auditor to continue original engagement, it will be scope limitation
whose effect is pervasive. Auditor shall withdraw from engagement and shall consider whether
there is any obligation to report to TCWG, owners or regulators. If withdrawal is not possible and
practicable, auditor shall express disclaimer of opinion on financial statements.

APPENDIX

APX: DETERMINING THE ACCEPTABILITY OF AFRF:

Factors to consider:
Auditor determines whether AFRF is acceptable considering following factors:
1. Nature of entity (e.g. profit oriented, not for profit, or public-sector entity)
2. Nature of financial statements (e.g. complete set of financial statements, or single financial
statement)
3. Purpose of financial statements (e.g. prepared for wide range of users or for specific users).
4. Whether law or regulation prescribes the AFRF (if prescribed, such framework is presumed
to be acceptable unless there are indications of deficiencies).

Attributes of AFRF:
Auditor shall determine whether framework exhibits the following attributes i.e.
 Relevance
 Completeness
 Reliability
 Neutrality
 Understandability