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{The following is the General Clarification (GC)/AASB/2/2004
issued by the Auditing and Assurance Standards Board of the Institute
of Chartered Accountants of India on Auditing and Assurance Standard (AAS)
26, "Terms of Audit Engagement."} |
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1. |
The Auditing and Assurance Standard (AAS) 26, Terms of
Audit Engagement was issued with a view to establish standards on:
- agreeing the terms of the engagement with the
client; and
- the auditor's response to a request by a client
to change the terms of an engagement to one that provides a lower
level of assurance.
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2. |
A question that arises is whether it is necessary that
the engagement letter issued by the auditor should be acknowledged by
addressee and returned to the auditor to indicate that the client's
understanding of the terms of the engagement is in accordance with the
engagement letter issued by the auditor and to establish that the
auditor has complied with the requirements of the Standard in so far
as they are related to sending the audit engagement letter. |
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3. |
Paragraphs 2 through 4 of AAS 26 provide as follows:
"2. The auditor and the client should agree on
the terms of the engagement.The agreed terms would need to be
recorded in an audit engagement letter or other suitable form of
contract.
3. This AAS is intended to assist the auditor in the preparation of
engagement letters relating to audits of financial statements. The
Standard is also applicable to related services. When other services
such as tax, accounting, or management consultancy and other
services are to be provided, separate letters may be appropriate.
4. Though the objective and scope of an audit and the auditor's
obligations are, normally, laid down in the applicable statute or
regulations and the pronouncements of the Institute of Chartered
Accountants of India, the audit engagement letters would be
informative for the clients."
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4. |
From the above it is clear that the basic purpose of
issuing an engagement letter is that the auditor and the client should
agree on the terms of the engagement. The auditor and the client are
normally considered to be agreeing on the terms of the engagement if
the objective and scope of an audit and the auditor's obligations are
laid down in the statute or regulations governing the engagement.
Examples of such engagements include audit under section 227 of the
Companies Act, 1956, audit of public sector banks, etc. In such cases,
it is not necessary that the engagement letter sent by the auditor in
accordance with paragraph 5 of AAS 26 is acknowledged by the addressee
and returned to the auditor to establish that the client's
understanding of the terms of the engagement is in accordance with the
engagement letter issued by the auditor. It shall be sufficient
compliance with the requirements related to sending the audit
engagement letter, if an engagement letter is appropriately delivered
to the client and the auditor retains the evidence for such delivery.
In such cases, the audit engagement letters would be informative for
the clients. |
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5. |
If, however, the client seeks any further explanations
or clarification in regard to any terms, conditions or other contents
of the engagement letter issued, it might indicate that there exists a
difference in understanding of the terms of audit engagement either on
the part of the client or on the part of the auditor. The auditor, in
such cases, should take necessary steps to resolve the issues, for
example by appropriately replying to the issues raised by the client.
It is also desirable that the auditor documents the evidence
indicating that the issues are settled and the client and auditor
agree on the terms of the engagement. |
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6. |
There may be certain engagements where the objective
and scope of the engagement and the auditor's obligations are not laid
down in the applicable statute or regulations. In such situations, the
auditor should request the client that a copy of the engagement letter
be acknowledged by the addressee and returned to the auditor to
establish:
- that the client's understanding of the
arrangements for the engagement is in accordance with the engagement
letter issued by the auditor; and
- that the auditor has complied with the
requirements of the standard in so far as they are related to
sending the audit engagement letter.
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