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Friday 25 March 2011

TERMS OF AUDIT ENGAGEMENT

The auditor and the client should - agree on the terms of the engagement. The agreement should be in writing.
Audit Engagement Letters: The auditor should send an engagement letter, preferably before the commencement of the engagement, to help avoid any misunderstanding.
Principal contents of audit engagement letter
a. Objective of Audit of financial statements.
b. Management's responsibility for the financial statements.
c. Management's responsibility for selection and consistent application of accounting policies and accounting standards. ¬
d. Management's responsibility for preparing the financial statements on a going concern basis.
e. Management's responsibility for making judgements and estimates that are reasonable and prudent.
f. Management's responsibility for the maintenance of adequate records and internal controls.
g. The scope of audit, including reference to applicable legislation, regulations, etc.
h. The fact that having regard to test nature of an audit, persuasive rather than conclusive nature of audit evidence together with inherent limitations of internal control system, there is an unavoidable risk that some fraud and error may remain undetected.
i. Unrestricted access to whatever records, documentation and other information requested in connection with audit.
Additional matters in the engagement letter
a. Planning of the audit
b. Written confirmation from management in connection with audit
c. Request for the client to confirm the terms of engagement by acknowledging the receipt of the engagement letter.
d. Any other reports or letters the auditor expects to issue.
e. Fees and billing arrangements.
f. Involvement of other auditors and experts
g. involvement of internal auditors and other staff of the client.
h. Arrangement with predecessor auditor.
i. Any restrictions of the auditors liability, where such possibility exists.
Audit of Components (e.g. Subsidiary, Branch, Division, etc)
When the auditor of parent company is also the auditor of its subsidiary, branch or division, he should consider certain factors like legal requirements, independence of management, degree of ownership by parent, extent of work performed by other auditors etc in deciding whether to issue separate engagement letters.
Recurring Audits
The auditor should consider whether the circumstances require the terms of the engagement to be revised and whether there is a need to remind the client of the existing terms of the engagement.
Acceptance of a change in engagement
 In case an auditor. is requested to change the engagement to one that provides a lower level of assurance before completion of the engagement, he should consider the appropriateness of doing so and should agree on the new terms.
 A change in circumstances that affects the entity's requirements or a misunderstanding concerning the nature of service originally requested would ordinarily be considered a reasonable basis for requesting change in engagement.
 Before agreeing to change, the auditor should consider, any legal or contractual implications of the change.
 Where the terms of engagement are changed, the auditor and client would agree on new terms.
 The auditor would not agree to change of engagement if there is no reasonable justification for doing so.
 If the auditor is unable to agree to a change of the engagement and is not permitted to continue the original engagement, he should withdraw from the engagement and consider any obligation to report the circumstances necessitating the withdrawal to other parties, viz. Board of directors or shareholders.

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