Identify any communications in addition to the auditor’s report.
Discuss audit planning and performance, including composition of the audit team.
Remind management about the expectation of written representation, the agreement to make available draft financial statements on a timely basis, and the agreement for management to inform the auditor of subsequent events or facts discovered after the date of the financial statements that may affect the financial statements.
Detail fees and billing arrangements.
Request management to acknowledge receipt of the engagement letter and to agree to the terms by signing the letter.
(AU-C 210.A23)
The auditor may also choose to address arrangements concerning the involvement of other auditors, specialists, internal auditors and other entity staff, and predecessor auditors. Restrictions on auditor’s liability, when not prohibited; audit documentation to be provided to other parties; additional services; arrangements with component auditors; and any other agreements with the entity may be included in the engagement letter. (AU-C 210.A24)
If the auditor fails to establish an understanding, the auditor should decline the engagement. (AU-C 210.08) A sample engagement letter is included at the end of this chapter.
Initial Audits, Including Reaudits
Inquiry of the predecessor auditor is required because the predecessor may provide information that will assist the successor auditor in deciding whether to accept the engagement. The communication may be either written or oral. Both the predecessor and successor auditors should treat any information obtained from each other as confidential information. The successor auditor should request permission from the prospective client to make an inquiry of the predecessor prior to final acceptance of the engagement. However, the successor auditor may make a proposal for an audit engagement before having permission to inquire of the predecessor auditor.
The successor auditor should ask the prospective client to authorize the predecessor to respond fully to the successor auditor’s inquiries. If a prospective client refuses to permit the predecessor auditor to respond or limits the response, the successor auditor should inquire as to the reasons and consider the implications of that refusal in deciding whether to accept the engagement. (AU-C 210.11) The successor auditor should make specific and reasonable inquiries of the predecessor about the following four matters:
1 Information about management’s integrity
2 Disagreements with management about accounting principles, auditing procedures, or other significant matters
3 Communications to those charged with governance and responsibility regarding fraud, noncompliance with laws or regulations, and matters related to internal control
4 The predecessor auditor’s understanding of the reasons for the change of auditors
(AU-C 210.A31)
The predecessor auditor should respond promptly, fully, and factually. However, if the predecessor decides, due to unusual circumstances such as impending, threatened, or potential litigation; disciplinary proceedings; or other unusual circumstances, not to respond fully, he or she should indicate that the response is limited. Also, if more than one auditor is considering accepting the audit, the predecessor auditor does not have to respond to inquiries until an auditor has been selected by the entity and has accepted the engagement. Any information exchanged between the predecessor and successor auditors should be considered confidential. (AU-C 210.A28–A.30)
If the successor auditor receives a limited response, that auditor should consider the implications of the limited response in deciding whether to accept the engagement. (AU-C 210.12)
Recurring Audits
For a recurring audit, the auditor should evaluate whether the terms of the engagement need to be changed. The auditor should also remind the client about the existing terms of engagement. (AU-C 210.13)
Change in Terms
If the client requests a change in the terms, the auditor must ensure that there is a reasonable justification for the change. So, too, if prior to completion of an audit, the client requests a change to an engagement with a lower level of assurance, the auditor must be satisfied that a reasonable justification for doing so exists. (AU-C 210.14 and .15)
Certain factors may warrant a change in the terms of engagement for a recurring engagement. These might include, for example, changes in:
Management or ownership,
Legal or regulatory requirements,
The size of the entity, or
The financial reporting framework.
(AU-C 210.A33)
If the terms are changed, the auditor and management should document in writing the mutually agreed-upon change. (AU-C 210.16) If, however, the auditor concludes there is no reasonable justification for a change in terms, and management does not allow the auditor to continue the original audit, the auditor must take these three steps:
1 Withdraw from the engagement.
2 Communicate the situation to those charged with governance.
3 Determine whether the auditor has any legal, contractual, or other obligation to report the circumstances to owners, regulators, or other parties.
(AU-C 210.17)
Report Layout Required by Law or Regulation
If the report prescribed by law or regulation does not align with GAAS in significant ways, the auditor must decide whether the format would mislead the users and if the report could be reworded to align with GAAS or alternatively whether the auditor could attach a separate report.
If none of those remedies are available, the auditor should decline the engagement unless required by law or regulation not to perform the engagement. (AU-C 210.18)
AU-C 210 ILLUSTRATION
Illustration 1. Example of an Audit Engagement Letter (from AU-C 210.A42)
| The following is an example of an audit engagement letter for an audit of general purpose financial statements prepared in accordance with US GAAP. This letter is intended only to be a guide that may be used in conjunction with the considerations outlined in AU-C Section 210. The letter will vary according to individual requirements and circumstances and is drafted to refer to the audit of financial statements for a single reporting period. The auditor may seek legal advice about whether a proposed letter is suitable. | |
| Auditor’s letterhead | Smith and Jones Certified Public Accountants October 7, 20XX |
| Addressed to the appropriate representative of those charged with governance | Brock Warner Plainsmen, Inc. 2320 Tiger Blvd. Lancaster, PA 19701 |
| The objective and scope of the audit |
You have requested that we audit the financial statements of Plainsmen, Inc., which comprise the balance sheet as of December 31, 20XX, and the related statements of income, changes in stockholders’ equity, and cash flows for the year then ended, and the related notes to the financial statements. We are pleased to confirm our acceptance and our understanding of this audit engagement by means of this letter. Our audit will be conducted with the objective of our expressing an opinion on the financial
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