9 It is in the interests of both the entity and the auditor that the auditor sends an engagement letter, preferably before the commencement of the audit, to help avoid misunderstandings with respect to the engagement. Ordinarily, the engagement letter documents and confirms the auditor’s acceptance of the appointment, the objective and scope of the audit, the extent of the auditor’s responsibilities to the entity and the form of any reports.
Principal Contents
10 The form and content of audit engagement letters may vary for each entity, but they would generally include reference to:
The objective of the audit of the financial report.
Management’s responsibility, with oversight from those charged with governance, for the subject matter of the audit as described in ASA 200 Objective and General Principles Governing an Audit of a Financial Report.
The scope of the audit, including reference to applicable regulations and the relevant ethical requirements relating to audit engagements to which the auditor adheres.
The form of any reports or other communication of results of the engagement.
The fact that because of the test nature and other inherent limitations of an audit, together with the inherent limitations of internal control, there is an unavoidable risk that even some material misstatement may remain undiscovered.
Unrestricted access to whatever records, documentation and other information is requested in connection with the audit.
11 The auditor may also wish to include in the engagement letter:
Arrangements regarding the planning and performance of the audit.
Expectation of receiving from management written confirmation concerning representations made in connection with the audit.
Request for the entity to confirm the terms of the engagement by acknowledging receipt of the engagement letter.
Description of any other letters or reports the auditor expects to issue to the entity.
Basis on which fees are computed and any billing arrangements.
12 When relevant, the following points could also be included:
Arrangements concerning the involvement of other auditors and experts in some aspects of the audit.
Arrangements concerning the involvement of internal auditors and other entity staff.
Arrangements to be made with the predecessor auditor, if any, in the case of an initial audit.
Any restriction of the auditor’s liability when such possibility exists.
A reference to any further agreements between the auditor and the entity.
A reference to other applicable legislation such as the privacy legislation.
Clarification of the entity’s responsibility for control issues relevant to the presentation of electronic information, where the entity’s audited financial report (or other audited subject matter) is presented on an internet web site.
For special purpose audit engagements, a reference to the auditor not assuming any responsibility for reliance on the audited financial report (or other audited subject matter) if it is used or disseminated other than for the stated purpose for which it was intended (for example, when the audited financial report is released to third parties without the auditor’s consent).
An example of an audit engagement letter is set out in Appendix 1.
Auditor Independence
13 When the audit is conducted in accordance with Part 2M.3 of the Corporations Act 2001, the auditor ordinarily includes in the written terms of the engagement:
A statement confirming that, to the best of the auditor’s knowledge and belief, the auditor currently meets the independence requirements of the Corporations Act 2001 in relation to the audit of the financial report.
A statement confirming that, should the auditor become aware that the auditor has contravened the independence requirements of the Corporations Act 2001, the auditor will notify the entity on a timely basis.
14 The Corporations Act 2001 contains general and specific provisions in relation to auditor independence, a range of specific restrictions on the employment relationships existing between the audited entity and its auditor and provisions relating to the auditor’s attendance at an entity’s annual general meeting, which the auditor may also include in the engagement letter.
Audits of Components
15 When the auditor of a parent entity is also the auditor of its subsidiary, branch or division (component), the factors that influence the auditor’s decision whether to send a separate engagement letter to the component include:
Who appoints the auditor of the component.
Whether a separate audit report is to be issued on the component.
Legal requirements.
The extent of any work performed by other auditors.
The degree of ownership by the parent entity.
The degree of independence of the component management.
Whether the terms of engagement for each component are the same.
Relevant regulatory requirements.
16 The auditor may send one engagement letter relating to the group as a whole. In such cases, the auditor ordinarily identifies each component of the entity whose financial report is to be audited, the date and period covered by the financial report and any other relevant reporting requirements.
17 The terms of the engagement shall identify the applicable financial reporting framework.