The following is an example of an audit engagement letter for an audit of a general purpose financial report prepared in accordance with Australian Accounting Standards and the Corporations Act 2001. This letter is not authoritative but is intended only to be a guide that may be used in conjunction with the considerations outlined in this Auditing Standard. It will need to be varied according to individual requirements and circumstances. It is drafted to refer to the audit of a financial report for a single reporting period and would require adaptation if intended or expected to apply to recurring audits (see paragraph 13 of this Auditing Standard). It may be appropriate to seek legal advice that any proposed letter is suitable.
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To the appropriate representative of management or those charged with governance of ABC Company:[22]
[The objective and scope of the audit]
You[23] have requested that we audit the financial report of ABC Company which comprises the statement of financial position as at 30 June 20X1 and the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and notes to the financial statements including material accounting policy information, and the directors’ declaration. We are pleased to confirm our acceptance and our understanding of this audit engagement by means of this letter.
The objectives of our audit are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report.
[The responsibilities of the auditor]
We will conduct our audit in accordance with Australian Auditing Standards. Those standards require that we comply with ethical requirements. As part of an audit in accordance with Australian Auditing Standards, we exercise professional judgement and maintain professional scepticism throughout the audit. We also:
Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
Section Determining the Acceptability of General - ASA 210 - Agreeing the Terms of Audit Engagements - October 2009 - Determining the Acceptability of General Purpose Frameworks | Zoe
Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. [24] However, we will communicate to you in writing concerning any significant deficiencies in internal control relevant to the audit of the financial report that we have identified during the audit.
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern.
Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation.
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 Australian Auditing Standards.
[The responsibilities of management and identification of the applicable financial reporting framework (for purposes of this example, it is assumed that the auditor has not determined that the law or regulation prescribes those responsibilities in appropriate terms; the descriptions in
paragraph 6(b) of this Auditing Standard are therefore used).]
Our audit will be conducted on the basis that [management and, where appropriate, those charged with governance][25] acknowledge and understand that they have responsibility:
For the preparation of the financial report that gives a true and fair view in accordance with the Corporations Act 2001 and Australian Accounting Standards;[26]
For such internal control as [management] determines is necessary to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error; and
Access to all information of which the directors and management are aware that is relevant to the preparation of the financial report such as records, documentation and other matters;
Additional information that we may request from the directors and management for the purpose of the audit;
Unrestricted access to persons within the entity from whom we determine it necessary to obtain audit evidence; and
Aus (d) [Where applicable, in respect of other information:
You will inform us of all the documents that you expect to issue that may comprise other information;
If the other information is to be provided prior to the auditor’s report date:
[The financial report and any other information you may obtain prior to the date of your auditor’s report will be consistent with one another, and the other information will not contain any material misstatements;] or
If the other information will not be provided prior to the auditor’s report date:
[With regard to any other information that you may not obtain prior to the date of the auditor’s report, that we intend to prepare and issue will provided to you by [insert date] to enable you to complete your required procedures.]]
As part of our audit process, we will request from [management and, where appropriate, those charged with governance], written confirmation concerning representations made to us in connection with the audit.
We look forward to full cooperation from your staff during our audit.
[Other relevant information]
[Insert other information, such as fee arrangements, billings and other specific terms, as appropriate.]
[Reporting]
[Insert appropriate reference to the expected form and content of the auditor’s report, including, if applicable, the reporting on other information in accordance with ASA 720.]
The form and content of our report may need to be amended in the light of our audit findings.
Other Matters under the Corporations Act 2001
Independence
We confirm that, to the best of our knowledge and belief, we currently meet the independence requirements of the Corporations Act 2001 in relation to the audit of the financial report. In conducting our audit of the financial report, should we become aware that we have contravened the independence requirements of the Corporations Act 2001, we shall notify you on a timely basis. As part of our audit process, we shall also provide you with a written independence declaration as required by the Corporations Act 2001.
The Corporations Act 2001 includes specific restrictions on the employment relationships that can exist between the audited entity and its auditors. To assist us in meeting the independence requirements of the Corporations Act 2001, and to the extent permitted by law and regulation, we request you discuss with us:
the provision of services offered to you by [insert firm name] prior to engaging or accepting the service; and
the prospective employment opportunities of any current or former partner or professional employee of [insert firm name] prior to the commencement of formal employment discussions with the current or former partner or professional employee.
Annual General Meetings
The Corporations Act 2001 provides that shareholders can submit written questions to the auditor before an Annual General Meeting provided that they relate to the auditor’s report or the conduct of the audit. To assist us in meeting this requirement in the Corporations Act 2001 relating to Annual General Meetings, we request you provide to us written questions submitted to you by shareholders as soon as practicable after the question(s) is received and no later than five business days before the Annual General Meeting, regardless of whether you believe them to be irrelevant. [Applicable only to listed entities]
Presentation of Audited Financial Report on the Internet
It is our understanding that ABC Company intends to publish a hard copy of the audited financial report and auditor’s report for members, and to electronically present the audited financial report and auditor’s report on its internet web site. When information is presented electronically on a web site, the security and controls over information on the web site should be addressed by the entity to maintain the integrity of the data presented. The examination of the controls over the electronic presentation of audited financial information on the entity’s web site is beyond the scope of the audit of the financial report. Responsibility for the electronic presentation of the financial report on the entity’s web site is that of the governing body of the entity.
Please sign and return the attached copy of this letter to indicate your acknowledgement of, and agreement with, the arrangements for our audit of the financial report including our respective responsibilities.
Yours faithfully
......................
Partner
XYZ & Co.
Acknowledged and agreed on behalf of ABC Company by
(signed)
......................
Name and Title
Date
Appendix 2
(Ref: Para. A10)
Determining the Acceptability of General Purpose Frameworks
Jurisdictions that Do Not Have Authorised or Recognised Standards Setting Organisations or Financial Reporting Frameworks Prescribed by Law or Regulation
As explained in paragraph A10, when an entity is registered or operating in a jurisdiction that does not have an authorised or recognised standards setting organisation, or where use of the financial reporting framework is not prescribed by law or regulation, management identifies an applicable financial reporting framework. Practice in such jurisdictions is often to use the financial reporting standards established by one of the organisations described in paragraph A8.
Alternatively, there may be established accounting conventions in a particular jurisdiction that are generally recognised as the financial reporting framework for a general purpose financial report prepared by certain specified entities operating in that jurisdiction. When such a financial reporting framework is adopted, the auditor is required by paragraph 6(a) to determine whether the accounting conventions collectively can be considered to constitute an acceptable financial reporting framework for a general purpose financial report. When the accounting conventions are widely used in a particular jurisdiction, the accounting profession in that jurisdiction may have considered the acceptability of the financial reporting framework on behalf of the auditors. Alternatively, the auditor may make this determination by considering whether the accounting conventions exhibit attributes normally exhibited by acceptable financial reporting frameworks (see paragraph 3 below), or by comparing the accounting conventions to the requirements of an existing financial reporting framework considered to be acceptable (see paragraph 4 below).
Acceptable financial reporting frameworks normally exhibit the following attributes that result in information provided in financial reports that is useful to the intended users:
Relevance, in that the information provided in the financial report is relevant to the nature of the entity and the purpose of the financial report. For example, in the case of a business enterprise that prepares a general purpose financial report, relevance is assessed in terms of the information necessary to meet the common financial information needs of a wide range of users in making economic decisions. These needs are ordinarily met by presenting the financial position, financial performance and cash flows of the business enterprise.
Completeness, in that transactions and events, account balances and disclosures that could affect conclusions based on the financial report are not omitted.
Reliability, in that the information provided in the financial report:
Where applicable, reflects the economic substance of events and transactions and not merely their legal form; and
Results in reasonably consistent evaluation, measurement, presentation and disclosure, when used in similar circumstances.
Neutrality, in that it contributes to information in the financial report that is free from bias.
Understandability, in that the information in the financial report is clear and comprehensive and not subject to significantly different interpretation.
The auditor may decide to compare the accounting conventions to the requirements of an existing financial reporting framework considered to be acceptable. For example, the auditor may compare the accounting conventions to IFRS Accounting Standards. For an audit of a small entity, the auditor may decide to compare the accounting conventions to a financial reporting framework specifically developed for such entities by an authorised or recognised standards setting organisation. When the auditor makes such a comparison and differences are identified, the decision as to whether the accounting conventions adopted in the preparation of the financial report constitute an acceptable financial reporting framework includes considering the reasons for the differences and whether application of the accounting conventions, or the description of the financial reporting framework in the financial report, could result in a financial report that is misleading.
A conglomeration of accounting conventions devised to suit individual preferences is not an acceptable financial reporting framework for a general purpose financial report. Similarly, a compliance framework will not be an acceptable financial reporting framework, unless it is generally accepted in the particular jurisdictions by preparers and users.