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ISA 210 Terms of Audit Engagements

ISA 210 Terms of Audit Engagements
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ISA 210, “Terms of Audit Engagements,” is an International Standard on Auditing issued by the International Auditing and Assurance Standards Board (IAASB). It provides guidance to auditors on the process of agreeing on the terms of an audit engagement with the client, including the responsibilities of the auditor and the client, the scope of the audit, and other important considerations.

 

Definitions:

 

  1. a) Audit Engagement:

Refers to the specific arrangement between the auditor and the client for the conduct of an audit.

  1. b) Audit Engagement Letter:

Refers to the written communication that documents and confirms the terms of the audit engagement, including the scope of the audit, the responsibilities of the auditor and the client, and other relevant terms.

  1. c) Terms of Audit Engagements:

Refers to the arrangements made between the auditor and the client regarding the conduct of the audit engagement, as documented in the audit engagement letter.

 

Explanations:

ISA 210 emphasizes the importance of establishing clear and mutually agreed-upon terms of the audit engagement to ensure that the audit is conducted effectively and efficiently. The audit engagement letter serves as a formal written agreement between the auditor and the client, outlining the key terms and conditions of the audit engagement. The auditor should obtain an understanding of the client’s requirements and expectations, and ensure that the terms of the engagement are clearly defined, agreed upon, and documented in the engagement letter.

 

The engagement letter typically includes the following elements:

  1. a) Objective and scope of the audit:

The engagement letter should specify the objective of the audit and the scope of the audit work to be performed. It should outline the financial statements or other information to be audited, and any limitations on the scope of the audit, if applicable.

  1. b) Responsibilities of the auditor:

The engagement letter should clearly state the responsibilities of the auditor, including the compliance with relevant auditing standards, the exercise of professional judgment, and the communication of audit findings to the client’s management and those charged with governance.

  1. c) Responsibilities of the client:

The engagement letter should clearly state the responsibilities of the client, including the preparation of financial statements in accordance with applicable financial reporting framework, providing access to all relevant records, documents, and information, and ensuring that the representations made to the auditor are complete and accurate.

  1. d) Timing of the audit:

The engagement letter should specify the timing of the audit work, including the period covered by the audit, the date of the auditor’s report, and any other deadlines or milestones.

  1. e) Fees and billing arrangements:

The engagement letter should specify the fees and billing arrangements for the audit services, including any additional services to be provided, and the terms of payment.

  1. f) Other relevant terms:

The engagement letter may also include other relevant terms, such as the communication of engagement team members, the confidentiality of information, and the termination of the engagement.

 

Examples:

Example 1:

ABC & Co., a public accounting firm, has been engaged to audit the financial statements of XYZ Corporation for the year ended December 31, 2022. The engagement partner prepares an engagement letter and discusses the terms of the engagement with XYZ Corporation’s management. The engagement letter includes the following terms:

Objective and scope of the audit: The audit will be conducted in accordance with International Standards on Auditing and will cover the financial statements of XYZ Corporation for the year ended December 31, 2022.

Responsibilities of the auditor: The auditor will exercise professional judgment, perform audit procedures to obtain reasonable assurance about whether the financial statements are free from material misstatement, and communicate audit findings to the management and those charged with governance.

Responsibilities of the client: XYZ Corporation’s management will be responsible for the preparation of financial statements in accordance with applicable financial reporting framework, providing access to all relevant records, documents, and information, and ensuring that the representations made to the auditor are complete and accurate.

Timing of the audit: The audit work will be conducted during the first quarter of 2023, and the auditor’s report will be dated no later than March 31, 2023.

Fees and billing arrangements: The fees for the audit services will be based on the agreed-upon fee schedule and will be billed upon completion of the audit, with payment due within 30 days of the invoice date.

Other relevant terms: The engagement team members will communicate any significant issues or changes in the audit engagement to XYZ Corporation’s management. The information obtained during the audit will be treated as confidential, and the engagement may be terminated by either party upon written notice.

Example 2:

XYZ Corporation engages LMN & Associates, a local accounting firm, to conduct an audit of its financial statements for the year ended December 31, 2022. However, due to unforeseen circumstances, XYZ Corporation experiences delays in providing access to some of its records and information to the auditor. The engagement letter between XYZ Corporation and LMN & Associates includes a provision that states that the auditor’s responsibility is contingent upon the timely provision of all necessary records and information by XYZ Corporation. In this case, the auditor may need to revise the terms of the engagement, including the timing of the audit and the fees, to account for the delays caused by XYZ Corporation.

 

Case Studies:

Case Study 1:

XYZ Corporation engages ABC & Co., a reputable audit firm, to conduct an audit of its financial statements for the year ended December 31, 2022. The engagement letter is prepared and signed by both parties, clearly stating the objective and scope of the audit, the responsibilities of the auditor and the client, the timing of the audit, the fees and billing arrangements, and other relevant terms. During the audit, the engagement team at ABC & Co. identifies significant issues with XYZ Corporation’s internal controls and identifies material misstatements in the financial statements. The audit is completed in accordance with the terms of the engagement, and the auditor’s report includes a qualified opinion due to the identified issues. XYZ Corporation’s management acknowledges the findings and takes appropriate actions to address the issues identified, which results in improvements in the internal controls and the financial reporting process for subsequent years.

 

Case Study 2:

LMN & Associates is engaged by XYZ Corporation to conduct an audit of its financial statements for the year ended December 31, 2022. The engagement letter is prepared and signed, but it does not clearly specify the responsibilities of the auditor and the client, the scope of the audit, and the timing of the audit. During the audit, there are delays in obtaining necessary records and information from XYZ Corporation, which results in delays in completing the audit work. The engagement team also identifies significant issues with XYZ Corporation’s internal controls, but due to the lack of clarity in the engagement letter, there are disagreements between the auditor and the client regarding the responsibilities and scope of the audit. The audit report is delayed, and the relationship between the auditor and the client becomes strained. This could have been avoided if the engagement letter had clearly outlined the terms of the engagement, including the responsibilities of the auditor and the client, and the scope and timing of the audit.

 

In conclusion, ISA 210, “Terms of Audit Engagements,” emphasizes the importance of establishing clear and mutually agreed-upon terms of the audit engagement through an engagement letter. The engagement letter should clearly outline the objective and scope of the audit, the responsibilities of the auditor and the client, the timing of the audit, the fees and billing arrangements, and other relevant terms