SA 210 deals with the key considerations that Independent Auditor needs to keep in mind on the terms of the Audit engagement with Management or ‘Those charged with Governance’.
Introduction & Scope
This Revised Standard on Auditing (SA 210) deals with the auditor’s responsibilities in agreeing to the terms of the audit engagement with management. SA 210 establishes the preconditions for an audit, terms of an audit engagement and changes thereof, segregates the responsibility of the management and auditors etc.
Auditor’s Objective is to accept or continue an audit engagement only when the basis upon which it is to be performed has been agreed, through
1. Ensuring if the Preconditions for an audit are present
2. Confirming if there is a common understanding between auditor and management
1. Preconditions for an audit:
The use by management of an acceptable financial reporting framework in the preparation of the financial statements and the agreement of management and, where appropriate, those charged with governance to the premise on which an audit is conducted.
For the purposes of this SA, references to “management” should be read hereafter as “management and, where appropriate, those charged with governance”.
Audit – Preconditions
If the preconditions for an audit are not present and the auditor after the discussion with the management is not in acceptance then auditor shall not accept the proposed audit engagement unless required by law or regulation to do so.
Limitation on Scope
Auditor shall not accept an audit engagement if the management imposes any limitation on the scope which will result in the auditor disclaiming an opinion on the financial statements, unless required by law or regulation to do so.
Agreement on Audit Engagement Terms
Listed below are the requirements for an Audit Engagement terms:
1. Terms of the audit engagement to be agreed with the management
2. Agreed terms to be recorded in an audit engagement letter or any other written form which includes:
i. Objective and Scope of the audit
ii. Auditor’s responsibilities
iii. Management’s responsibilities
iv. Identification of the applicable financial reporting framework
v. Reference to the expected form and content of reports which the auditor might issue and exceptions if any to it
3. If there is any specific law or regulation which prescribes the term of a particular audit engagement, the auditor can simply refer to such law in the written agreement and take Management’s acknowledgment for its responsibilities, instead of elaborating the terms of that law again
4. If law or regulation prescribes management responsibilities similar to those required by SA 210, then the auditor can use the wording of the law or regulation in the written agreement. For other responsibility not prescribed by law or regulation, then the responsibilities as stated in SA 210 can be used
In case of recurring audits, the audit should assess if there is any requirement for revision of the audit engagement terms and wherever required remind the entity of existing terms.
Acceptance of change in Audit Engagements
Following are the requirements to be adhered to by the auditor if there are any changes to the ongoing audit engagements (eg) Significant change in ownership or nature of entity’s business:
Additional Consideration in Engagement Acceptance
A. In the event of any conflicts between financial reporting standards (established by an authorized or recognized standards-setting organization) and the supplementing law or regulation, the auditor shall discuss with management and agree whether:
i. The additional requirements can be met through additional disclosures in the financial statements
ii. The description of the applicable financial reporting framework in the financial statements can be amended accordingly
If neither of the above actions is possible, the auditor should determine whether it will be necessary to modify the auditor’s opinion in accordance with SA 705.
B. If the auditor is of the opinion that the financial reporting framework prescribed by the law or regulation is unacceptable, then the auditor can accept the audit engagement only if:
i. Management provides additional disclosures in the financial statements to avoid any misleading fact
ii. It is recognized in the terms of the audit engagement that:
a. The auditor’s report to incorporate an Emphasis of Matter paragraph, drawing attention to the additional disclosures, in accordance with SA 706
b. Unless the auditor is required by law or regulation to express the auditor’s opinion on the financial statements by using the phrases “present fairly, in all material respects”, or “give a true and fair view”, the auditor’s opinion on the financial statements will not include such phrases
C. If the conditions stated for the financial reporting framework are not present and the auditor is required to take the engagement by law or regulation, then:
i. Evaluate the effect of misleading nature of the financial statements on the auditor’s report
ii. Include appropriate reference to this matter in the terms of audit engagement
D. Where applicable law or regulation prescribes the layout or wording of the auditor’s report in a form or in significantly different terms from SA requirements, then the auditor should evaluate:
i. Whether users might misunderstand the assurance obtained from audit
ii. Whether additional explanation in the auditor’s report can mitigate possible misunderstanding
If the auditor is of opinion that additional explanation cannot mitigate the misunderstanding, then auditor cannot accept the engagement unless required by law or regulation.
Effective Date: SA 210 is applicable for audits of financial statements for the period beginning on or after April 1, 2010.