Image unavailable in extracted textImage unavailable in extracted textAUDITING STANDARD ASA 210
Terms of Audit Engagements
Application
1 This Auditing Standard applies to:
(a) an audit of a financial report for a financial year, or an audit of a financial report for a half-year, in accordance with Part 2M.3 of the Corporations Act 2001; and
(b) an audit of a financial report for any other purpose.
2 This Auditing Standard also applies, as appropriate, to an audit of other financial information.
Operative Date
3 This Auditing Standard is operative for financial reporting periods commencing on or after 1 July 2006.
[Note: For operative dates of paragraphs changed or added by an amending Standard, see Compilation Details.]
Introduction
4 The purpose of this Auditing Standard is to establish mandatory requirements and to provide explanatory guidance on:
(a) agreeing and documenting the terms of the audit engagement with the entity; and
(b) the auditor’s response to a request by the entity to change the terms of the audit engagement to one that provides a lower level of assurance.
5 The auditor shall agree on the terms of the audit engagement with the entity, which shall be recorded in writing by the auditor and forwarded to the entity. When the audit engagement is undertaken pursuant to legislation, the minimum applicable terms are those contained in the legislation.
6 The agreed terms are ordinarily recorded in an audit engagement letter but may also be recorded in another suitable form of contract.
7 This Auditing Standard is intended to assist the auditor in the preparation of an engagement letter relating to an audit of a financial report.
8 In some instances, the objective and scope of an audit and the auditor’s obligations are established by law. For example, the objective of the audit of a financial report of certain entities is established by the Corporations Act 2001. Even in those situations, auditors may still find engagement letters informative for their clients.
Audit Engagement Letters
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.
Recurring Audits
18 On recurring audits, the auditor shall consider whether circumstances require the terms of the engagement to be revised, and whether there is a need to re-confirm in writing the existing terms of the engagement with the entity.
19 The auditor may decide not to send a new engagement letter each period. However, the following factors may make it appropriate to send a new engagement letter:
Any indication that the entity misunderstands the objective and scope of the audit.
Any revised or special terms of the engagement.
A recent change of senior management or those charged with governance.
A significant change in ownership.
A significant change in the nature or size of the entity’s business.
Legal or regulatory requirements.
Acceptance of a Change in the Terms of the Engagement
20 The auditor who, before the completion of the engagement, is requested to change the engagement to one which provides a lower level of assurance, shall consider the appropriateness of doing so.
21 A request from the entity for the auditor to change the terms of the engagement may result from a change in circumstances affecting the need for the service, a misunderstanding as to the nature of the audit or related service originally requested or a restriction on the scope of the engagement, whether imposed by management or caused by circumstances. Under paragraph 26 of this Auditing Standard, the auditor needs to carefully consider the reason given for the request, particularly the implications of a restriction on the scope of the engagement.
22 A change in circumstances that affects the entity’s requirements, or a misunderstanding concerning the nature of the service originally requested, is ordinarily considered to be a reasonable basis for requesting a change in the engagement. In contrast, a change is not considered to be reasonable if it appears that the change relates to information that is incorrect, incomplete or otherwise unsatisfactory.
23 Before agreeing to change the audit engagement to a review[1] or related service engagement, an auditor who was engaged to perform the audit in accordance with Auditing Standards ordinarily considers, in addition to the above matters, any legal or contractual implications of the change.
24 If the auditor concludes that there is reasonable justification to change the terms of the engagement and if the audit work performed complies with the Auditing Standards relevant to the changed terms of the engagement, the report issued would be that appropriate for the revised terms of the engagement. In order to avoid confusing the user, the report would not ordinarily include reference to:
(a) the original engagement; or
(b) any procedures that may have been performed in the original engagement, except where the engagement is changed to an engagement to undertake agreed-upon procedures and thus reference to the procedures performed is a normal part of the report.
25 Where the terms of the engagement are changed the auditor shall agree on the new terms with the entity and confirm them in writing.
26 The auditor shall not agree to a change in the terms of the engagement where there is no reasonable justification for doing so.
27 An example of where there is no reasonable justification might be an audit engagement where the auditor is unable to obtain sufficient appropriate audit evidence regarding receivables and the client asks for the engagement to be changed to a review engagement to avoid a qualified audit opinion or a disclaimer of opinion.
28 If the auditor is unable to agree to a change in the terms of the engagement and is not permitted to continue the original engagement, unless prohibited by law or regulation, the auditor shall withdraw from the engagement and consider whether there is any obligation, either contractual or otherwise, to report to other parties, such as those charged with governance or shareholders, the circumstances necessitating the withdrawal.
29 In some cases, law or regulation may limit the auditor’s ability to withdraw from the engagement. In such cases, the auditor ordinarily considers the effect on the auditor’s report.
Conformity with International Standards on Auditing
30 Except as noted below, this Auditing Standard conforms with International Standard on Auditing ISA 210 Terms of Audit Engagements, issued by the International Auditing and Assurance Standards Board of the International Federation of Accountants. The main differences between this Auditing Standard and ISA 210 are:
This Auditing Standard contains mandatory requirements for the auditor to record the agreed terms of the audit engagement in writing and forward them to the entity (paragraphs 5, 18 and 25). ISA 210 does not require the terms of the audit engagement to be recorded in writing.
This Auditing Standard contains a mandatory requirement that where the audit is undertaken pursuant to legislation, the minimum applicable terms in an engagement letter are those contained in the legislation whereas ISA 210 does not (paragraph 5).
This Auditing Standard contains explanatory guidance on documenting certain matters in the engagement letter relating to auditor independence where the engagement is conducted pursuant to Part 2M.3 of the Corporations Act 2001 (paragraphs 13 and 14). ISA 210 does not require the auditor to document certain matters in the engagement letter relating to auditor independence.
This Auditing Standard provides explanatory guidance relating to circumstances where the auditor of a parent entity is also the auditor of its component and elects to send one engagement letter relating to a group as a whole (the audit of components), whereas ISA 210 does not (paragraphs 15 and 16).
The example engagement letter in Appendix 1 of this Auditing Standard includes matters relating to auditor independence and the presentation of the financial report on the internet, whereas ISA 210 does not.
This Auditing Standard does not include a separate section on the public sector as it is sector neutral. ISA 210 includes a Public Sector Perspective section.
Compliance with this Auditing Standard enables compliance with ISA 210.