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SA 210 (Revised) Agreeing the Terms of the Audit Engagements (Effective for all audits relating to accounting
periods beginning on or Standard on Auditing (SA) 210 (Revised), “Agreeing the Terms of Audit Engagements” should be read in the context of the “Preface to the Standards on Quality Control, Auditing, Review, Other Assurance and Related Services1,” which sets out the authority of SAs and proposed SA 200(Revised), “Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing”2. Introduction Scope of this SA 1. This Standard on Auditing (SA) deals with the auditor’s responsibilities in agreeing the terms of the audit engagement with management and, where appropriate, those charged with governance. This includes establishing that certain preconditions for an audit, responsibility for which rests with management and, where appropriate, those charged with governance, are present. Proposed SA 220 (Revised)3 deals with those aspects of engagement acceptance that are within the control of the auditor. (Ref: Para. A1) Effective Date 2. This SA is effective for audits of financial statements for periods
beginning Objective
Definitions 4. For purposes of the SAs, the following term has the meaning
attributed 5. For the purposes of this SA, references to “management” should be read hereafter as “management and, where appropriate, those charged with governance”. Requirements Preconditions for an Audit 6. In order to establish whether the preconditions for an audit are
present,
Limitation on Scope Prior to Audit Engagement Acceptance 7. If management or those charged with governance impose a limitation on the scope of the auditor’s work in the terms of a proposed audit engagement such that the auditor believes the limitation will result in the auditor disclaiming an opinion on the financial statements, the auditor shall not accept such a limited engagement as an audit engagement, unless required by law or regulation to do so. Other Factors Affecting Audit Engagement Acceptance 8. If the preconditions for an audit are not present, the auditor shall discuss the matter with management. Unless required by law or regulation to do so, the auditor shall not accept the proposed audit engagement:
Agreement on Audit Engagement Terms 9. The auditor shall agree the terms of the audit engagement with management or those charged with governance, as appropriate. (Ref: Para. A20) 10. Subject to paragraph 11, the agreed terms of the audit engagement shall be recorded in an audit engagement letter or other suitable form of written agreement and shall include: (Ref: Para. A21-A24)
11. If law or regulation prescribes in sufficient detail the terms of the audit engagement referred to in paragraph 10, the auditor need not record them in a written agreement, except for the fact that such law or regulation applies and that management acknowledges and understands its responsibilities as set out in paragraph 6(b). (Ref: Para. A21, A25-A26) 12. If law or regulation prescribes responsibilities of management similar to those described in paragraph 6(b), the auditor may determine that the law or regulation includes responsibilities that, in the auditor’s judgment, are equivalent in effect to those set out in that paragraph. For such responsibilities that are equivalent, the auditor may use the wording of the law or regulation to describe them in the written agreement. For those responsibilities that are not prescribed by law or regulation such that their effect is equivalent, the written agreement shall use the description in paragraph 6(b). (Ref: Para. A25) Recurring Audits 13. On recurring audits, the auditor shall assess whether circumstances require the terms of the audit engagement to be revised and whether there is a need to remind the entity of the existing terms of the audit engagement. (Ref: Para. A27) Acceptance of a Change in the Terms of the Audit Engagement 14. The auditor shall not agree to a change in the terms of the audit engagement where there is no reasonable justification for doing so. (Ref: Para. A28-A30) 15. If, prior to completing the audit engagement, the auditor is requested to change the audit engagement to an engagement that conveys a lower level of assurance, the auditor shall determine whether there is reasonable justification for doing so. (Ref: Para. A31-A32) 16. If the terms of the audit engagement are changed, the auditor and management shall agree on and record the new terms of the engagement in an engagement letter or other suitable form of written agreement. 17. If the auditor is unable to agree to a change of the terms of the audit engagement and is not permitted by management to continue the original audit engagement, the auditor shall:
Additional Considerations in Engagement Acceptance Financial Reporting Standards6 Supplemented by Law or Regulation 18. If financial reporting standards established by an authorised or recognised standards setting organization are supplemented by law or regulation, the auditor shall determine whether there are any conflicts between the financial reporting standards and the additional requirements. If such conflicts exist, the auditor shall discuss with management the nature of the additional requirements and shall agree whether:
If neither of the above actions is possible, the auditor shall determine whether it will be necessary to modify the auditor’s opinion in accordance with SA 705 (Revised)7. (Ref: Para. A33) Financial Reporting Framework Prescribed by Law or Regulation—Other Matters Affecting Acceptance 19. If the auditor has determined that the financial reporting framework prescribed by law or regulation would be unacceptable but for the fact that it is prescribed by law or regulation, the auditor shall accept the audit engagement only if the following conditions are present: (Ref: Para. A34)
20. If the conditions outlined in paragraph 19 are not present and the auditor is required by law or regulation to undertake the audit engagement, the auditor shall:
Auditor’s Report Prescribed by Law or Regulation 21. In some cases, the law or regulation applicable to the entity prescribes the layout or wording of the auditor’s report in a form or in terms that are significantly different from the requirements of SAs. In these circumstances, the auditor shall evaluate:
If the auditor concludes that additional explanation in the auditor’s report cannot mitigate possible misunderstanding, the auditor shall not accept the audit engagement, unless required by law or regulation to do so. An audit conducted in accordance with such law or regulation does not comply with SAs. Accordingly, the auditor shall not include any reference within the auditor’s report to the audit having been conducted in accordance with SAs10. (Ref: Para. A35-A36) *** Application and Other Explanatory Material Scope of this SA (Ref: Para. 1) A1. Assurance engagements, which include audit engagements, may only be accepted when the practitioner considers that relevant ethical requirements such as independence and professional competence will be satisfied, and when the engagement exhibits certain characteristics11. The auditor’s responsibilities in respect of ethical requirements in the context of the acceptance of an audit engagement and in so far as they are within the control of the auditor are dealt with in proposed SA 220 (Revised)12. This SA deals with those matters (or preconditions) that are within the control of the entity and upon which it is necessary for the auditor and the entity’s management to agree. Preconditions for an Audit The Financial Reporting Framework (Ref: Para. 6(a)) A2. A condition for acceptance of an assurance engagement is that the criteria referred to in the definition of an assurance engagement are suitable and available to intended users13. Criteria are the benchmarks used to evaluate or measure the subject matter including, where relevant, benchmarks for presentation and disclosure. Suitable criteria enable reasonably consistent evaluation or measurement of a subject matter within the context of professional judgment. For purposes of the SAs, the applicable financial reporting framework provides the criteria the auditor uses to audit the financial statements, including where relevant their fair presentation. A3. Without an acceptable financial reporting framework, management does not have an appropriate basis for the preparation of the financial statements and the auditor does not have suitable criteria for auditing the financial statements. In many cases the auditor may presume that the applicable financial reporting framework is acceptable, as described in paragraphs A8-A9. Determining the Acceptability of the Financial Reporting Framework A4. Factors that are relevant to the auditor’s determination of the acceptability of the financial reporting framework to be applied in the preparation of the financial statements include:
A5. Many users of financial statements are not in a position to demand financial statements tailored to meet their specific information needs. While all the information needs of specific users cannot be met, there are financial information needs that are common to a wide range of users. Financial statements prepared in accordance with a financial reporting framework designed to meet the common financial information needs of a wide range of users are referred to as general purpose financial statements. A6. In some cases, the financial statements will be prepared in accordance with a financial reporting framework designed to meet the financial information needs of specific users. Such financial statements are referred to as special purpose financial statements. The financial information needs of the intended users will determine the applicable financial reporting framework in these circumstances. Proposed SA 800 discusses the acceptability of financial reporting frameworks designed to meet the financial information needs of specific users.14 A7. Deficiencies in the applicable financial reporting framework that indicate that the framework is not acceptable may be encountered after the audit engagement has been accepted. When use of that framework is prescribed by law or regulation, the requirements of paragraphs 19-20 apply. When use of that framework is not prescribed by law or regulation, management may decide to adopt another framework that is acceptable. When management does so, as required by paragraph 16, new terms of the audit engagement are agreed to reflect the change in the framework as the previously agreed terms will no longer be accurate. General purpose frameworks A8. At present, there is no objective and authoritative basis that has been generally recognised globally for judging the acceptability of general purpose frameworks. In the absence of such a basis, financial reporting standards established by organizations that are authorised or recognised to promulgate standards to be used by certain types of entities are presumed to be acceptable for general purpose financial statements prepared by such entities, provided the organizations follow an established and transparent process involving deliberation and consideration of the views of a wide range of stakeholders. Examples of such financial reporting standards include:
These financial reporting standards are often identified as the applicable financial reporting framework in law or regulation governing the preparation of general purpose financial statements. Financial reporting frameworks prescribed by law or regulation A9. In accordance with paragraph 6(a), the auditor is required to determine whether the financial reporting framework, to be applied in the preparation of the financial statements, is acceptable. Appendix 2 contains guidance on determining the acceptability of the financial reporting framework. In case of some entities, law or regulation may prescribe the financial reporting framework to be used in the preparation of general purpose financial statements. In the absence of indications to the contrary, such a financial reporting framework is presumed to be acceptable for general purpose financial statements prepared by such entities. In the event that the framework is not considered to be acceptable, paragraphs 19-20 apply. Agreement of the Responsibilities of Management (Ref: Para. 6(b)) A10. An audit in accordance with SAs is conducted on the premise that management has acknowledged and understands that it has the responsibilities set out in paragraph 6(b)15. In case of certain entities, such responsibilities may be specified in the applicable law or regulation. In others, there may be little or no legal or regulatory definition of such responsibilities. SAs do not override law or regulation in such matters. However, the concept of an independent audit requires that the auditor’s role does not involve taking responsibility for the preparation of the financial statements or for the entity’s related internal control, and that the auditor has a reasonable expectation of obtaining the information necessary for the audit in so far as management is able to provide or procure it. Accordingly, the premise is fundamental to the conduct of an independent audit. To avoid misunderstanding, agreement is reached with management that it acknowledges and understands that it has such responsibilities as part of agreeing and recording the terms of the audit engagement in paragraphs 9-12. A11. The way in which the responsibilities for financial reporting are divided between management and those charged with governance will vary according to the resources and structure of the entity and any relevant law or regulation, and the respective roles of management and those charged with governance within the entity. In most cases, management is responsible for execution while those charged with governance have oversight of management. In some cases, those charged with governance will have, or will assume, responsibility for approving the financial statements or monitoring the entity’s internal control related to financial reporting. In larger or public entities, a subgroup of those charged with governance, such as an audit committee, may be charged with certain oversight responsibilities. A12. SA 580 (Revised) requires the auditor to request management to
provide written representations that it has fulfilled certain of its
responsibilities16. It A13. Where management will not acknowledge its responsibilities, or agree to provide the written representations, the auditor will be unable to obtain sufficient appropriate audit evidence17. In such circumstances, it would not be appropriate for the auditor to accept the audit engagement, unless law or regulation requires the auditor to do so. In cases where the auditor is required to accept the audit engagement, the auditor may need to explain to management the importance of these matters, and the implications for the auditor’s report. Preparation of the Financial Statements (Ref: Para. 6(b)(i)) A14. Most financial reporting frameworks include requirements relating to the presentation of the financial statements; for such frameworks, preparation of the financial statements in accordance with the financial reporting framework includes presentation. In the case of a fair presentation framework the importance of the reporting objective of fair presentation is such that the premise agreed with management includes specific reference to fair presentation, or to the responsibility to ensure that the financial statements will “give a true and fair view” in accordance with the financial reporting framework. Internal Control (Ref: Para. 6(b)(ii)) A15. Management maintains such internal control as it determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Internal control, no matter how effective, can provide an entity with only reasonable assurance about achieving the entity’s financial reporting objectives due to the inherent limitations of internal control18. A16. An independent audit conducted in accordance with the SAs does not act as a substitute for the maintenance of internal control necessary for the preparation of financial statements by management. Accordingly, the auditor is required to obtain the agreement of management that it acknowledges and understands its responsibility for internal control. However, the agreement required by paragraph 6(b)(ii) does not imply that the auditor will find that internal control maintained by management has achieved its purpose or will be free of deficiencies. A17. It is for management to determine what internal control is necessary to enable the preparation of the financial statements. The term “internal control” encompasses a wide range of activities within components that may be described as the control environment; the entity’s risk assessment process; the information system, including the related business processes relevant to financial reporting, and communication; control activities; and monitoring of controls. This division, however, does not necessarily reflect how a particular entity may design, implement and maintain its internal control, or how it may classify any particular component.19 An entity’s internal control (in particular, its accounting books and records, or accounting systems) will reflect the needs of management, the complexity of the business, the nature of the risks to which the entity is subject, and relevant laws or regulation. A18. In some cases, law or regulation may refer to the responsibility of management for the adequacy of accounting books and records, or accounting systems. In some other cases, general practice may assume a distinction between accounting books and records or accounting systems on the one hand, and internal control or controls on the other. As accounting books and records, or accounting systems, are an integral part of internal control as referred to in paragraph A18, no specific reference is made to them in paragraph 6(b)(ii) for the description of the responsibility of management. To avoid misunderstanding, it may be appropriate for the auditor to explain to management the scope of this responsibility. Considerations Relevant to Smaller Entities (Ref: Para. 6(b)) A19. One of the purposes of agreeing the terms of the audit engagement is to avoid misunderstanding about the respective responsibilities of management and the auditor. For example, when a third party has assisted with the preparation of the financial statements, it may be useful to remind management that the preparation of the financial statements in accordance with the applicable financial reporting framework remains its responsibility. Agreement on Audit Engagement Terms Agreeing the Terms of the Audit Engagement (Ref: Para. 9) A20. The roles of management and those charged with governance in agreeing the terms of the audit engagement for the entity depend on the governance structure of the entity and relevant law or regulation. Audit Engagement Letter or Other Form of Written Agreement20 (Ref: Para. 10-11) A21. It is in the interests of both the entity and the auditor that the auditor sends an audit engagement letter before the commencement of the audit to help avoid misunderstandings with respect to the audit. In some entities, however, the objective and scope of an audit and the responsibilities of management and of the auditor may be sufficiently established by law, that is, they prescribe the matters described in paragraph 10. Although in these circumstances paragraph 11 permits the auditor to include in the engagement letter only reference to the fact that relevant law or regulation applies and that management acknowledges and understands its responsibilities as set out in paragraph 6(b), the auditor may nevertheless consider it appropriate to include the matters described in paragraph 10 in an engagement letter for the information of management. Form and Content of the Audit Engagement Letter A22. The form and content of the audit engagement letter may vary for each entity. Information included in the audit engagement letter on the auditor’s responsibilities may be based on SA 200 (Revised)21. Paragraphs 6(b) and 12 of this SA deal with the description of the responsibilities of management. In addition to including the matters required by paragraph 10, an audit engagement letter may make reference to, for example:
A23. When relevant, the following points could also be made in the
audit
An example of an audit engagement letter is set out in Appendix 1. Audits of Components A24. When the auditor of a parent entity is also the auditor of a component, the factors that may influence the decision whether to send a separate audit engagement letter to the component include the following:
Responsibilities of Management Prescribed by Law or Regulation (Ref: Para. 11-12) A25. If, in the circumstances described in paragraphs A22 and A27, the auditor concludes that it is not necessary to record certain terms of the audit engagement in an audit engagement letter, the auditor is still required by paragraph 11 to seek the written agreement from management that it acknowledges and understands that it has the responsibilities set out in paragraph 6(b). However, in accordance with paragraph 12, such written agreement may use the wording of the law or regulation if such law or regulation establishes responsibilities for management that are equivalent in effect to those described in paragraph 6(b). A26. In case of certain entities, such as, Central/State governments and related government entities (for example, agencies, boards, commissions), law or regulation governing the operations of that entities generally mandate the appointment of the auditor and commonly set out the auditor’s responsibilities and powers, including the power to access an entity’s records and other information. When law or regulation prescribes in sufficient detail the terms of the audit engagement, the auditor may nonetheless consider that there are benefits in issuing a fuller audit engagement letter than permitted by paragraph 11. Recurring Audits (Ref: Para. 13) A27. The auditor may decide not to send a new audit engagement letter or other written agreement each period. However, the following factors may make it appropriate to revise the terms of the audit engagement or to remind the entity of existing terms:
Acceptance of a Change in the Terms of the Audit Engagement Request to Change the Terms of the Audit Engagement (Ref: Para. 14) A28. A request from the entity for the auditor to change the terms of the audit engagement may result from a change in circumstances affecting the need for the service, a misunderstanding as to the nature of an audit as originally requested or a restriction on the scope of the audit engagement, whether imposed by management or caused by other circumstances. The auditor, as required by paragraph 14, considers the justification given for the request, particularly the implications of a restriction on the scope of the audit engagement. A29. A change in circumstances that affects the entity’s requirements or a
misunderstanding concerning the nature of the service originally requested
may
be considered a reasonable basis for requesting a change in the audit A30. In contrast, a change may not be considered reasonable if it appears that the change relates to information that is incorrect, incomplete or otherwise unsatisfactory. An example might be where the auditor is unable to obtain sufficient appropriate audit evidence regarding receivables and the entity asks for the audit engagement to be changed to a review engagement to avoid a qualified opinion or a disclaimer of opinion. Request to Change to a Review or a Related Service (Ref: Para. 15) A31. Before agreeing to change an audit engagement to a review or a related service, an auditor who was engaged to perform an audit in accordance with SAs may need to assess, in addition to the matters referred to in paragraphs A29-A31 above, any legal or contractual implications of the change. A32. If the auditor concludes that there is reasonable justification to change the audit engagement to a review or a related service, the audit work performed to the date of change may be relevant to the changed engagement; however, the work required to be performed and the report to be issued would be those appropriate to the revised engagement. In order to avoid confusing the reader, the report on the related service would not include reference to:
Additional Considerations in Engagement Acceptance Financial Reporting Standards Supplemented by Law or Regulation (Ref:
Para. A33. In case of some entities, law or regulation may supplement the financial reporting standards established by an authorised or recognised standards setting organization with additional requirements relating to the preparation of financial statements. In such cases, the applicable financial reporting framework for the purposes of applying the SAs encompasses both the identified financial reporting framework and such additional requirements provided they do not conflict with the identified financial reporting framework. This may, for example, be the case when law or regulation prescribes disclosures in addition to those required by the financial reporting standards or when they narrow the range of acceptable choices that can be made within the financial reporting standards22. Financial Reporting Framework Prescribed by Law or Regulation—Other Matters Affecting Acceptance (Ref: Para. 19) A34. Law or regulation may prescribe that the wording of the auditor’s opinion use the phrases “present fairly, in all material respects” or “give a true and fair view” in a case where the auditor concludes that the applicable financial reporting framework prescribed by law or regulation would otherwise have been unacceptable. In this case, the terms of the prescribed wording of the auditor’s report are significantly different from the requirements of SAs (see paragraph 21). Auditor’s Report Prescribed by Law or Regulation (Ref: Para. 21) A35. SAs require that the auditor shall not represent compliance with SAs unless the auditor has complied with all of the SAs relevant to the audit23. When law or regulation prescribes the layout or wording of the auditor’s report in a form or in terms that are significantly different from the requirements of SAs and the auditor concludes that additional explanation in the auditor’s report cannot mitigate possible misunderstanding, the auditor may consider including a statement in the auditor’s report that the audit is not conducted in accordance with SAs. The auditor is, however, encouraged to apply SAs, including the SAs that address the auditor’s report, to the extent practicable, notwithstanding that the auditor is not permitted to refer to the audit being conducted in accordance with SAs. A36. In case of certain entities, such as, Central/State governments and related government entities (for example, agencies, boards, commissions), specific requirements may exist within the legislation governing the audit mandate; for example, the auditor may be required to report directly to a regulator or the legislative body or the stakeholders if the entity attempts to limit the scope of the audit. Material Modifications to ISA 210, “Agreeing the Terms of Audit Engagements” Addition Paragraph A8 of ISA 210 provides the examples of the financial reporting standards, which can be used for the preparation and presentation of general purpose financial statements. Since in India, financial reporting standards, used for the preparation and presentation of financial statements, can be ‘Accounting Standards promulgated by the Accounting Standards Board of the Institute of Chartered Accountants of India or Accounting Standards, notified under Companies (Accounting Standards) Rules, 2006’ or ‘Accounting Standards for Local Bodies promulgated by Committee on Accounting Standards for Local Bodies (CASLB) of the Institute of Chartered Accountants of India (ICAI)’, these have been added in the list of examples of financial reporting standards. References have accordingly been changed. Deletions
Appendix 1 (Ref: Paras. A22-A23) Example of an Audit Engagement Letter The following is an example of an audit engagement letter for an audit of general purpose financial statements prepared in accordance with Financial Reporting Standards24 of a company registered under the Companies Act, 1956. This letter is not authoritative but is intended only to be a guide that may be used in conjunction with the considerations outlined in this SA. It will need to be varied according to individual requirements and circumstances. It is drafted to refer to the audit of financial statements for a single reporting period and would require adaptation if intended or expected to apply to recurring audits (see paragraph 13 of this SA). It may be appropriate to seek legal advice that any proposed letter is suitable. *** To the Board of Directors of ABC Company Limited:25 [The objective and scope of the audit] You26 have requested that we audit the financial statements of ABC Company Limited, which comprise the Balance Sheet as at March 31, 20X1, and the Statement of Profit & Loss, and Cash Flow Statement for the year then ended, and a summary of significant accounting policies and other explanatory information. 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 statements. 27 [The responsibilities of the auditor] We will conduct our audit in accordance with Standards on Auditing (SAs), issued by the Institute of Chartered Accountants of India (ICAI). Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. Because of the inherent limitations of an audit, together with the inherent limitations of internal control, there is an unavoidable risk that some material misstatements may not be detected, even though the audit is properly planned and performed in accordance with SAs. In making our risk assessments, we consider internal control relevant to the entity’s preparation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. However, we will communicate to you in writing concerning any significant deficiencies in internal control relevant to the audit of the financial statements that we have identified during the audit. [The responsibilities of management and identification of the applicable financial reporting framework (for purposes of this example it is assumed that the auditor has determined that the provisions of the Companies Act, 1956 relating to responsibility of the Board of Directors be supplemented by the descriptions in paragraph 6(b) of this SA).] Our audit will be conducted on the basis that [management and, where appropriate, those charged with governance]28 acknowledge and understand that they have responsibility:
As part of our audit process, we will request from [management and, where appropriate, those charged with governance], written confirmation concerning representations made to us in connection with the audit. We also wish to invite your attention to the fact that our audit process is subject to 'peer review' under the Chartered Accountants Act, 1949 to be conducted by an Independent reviewer. The reviewer may inspect, examine or take abstract of our working papers during the course of the peer review. We look forward to full cooperation from your staff during our audit. [Other relevant information] [Insert other information, such as fee arrangements, billings30 and other specific terms, as appropriate.] [Reporting] [Insert appropriate reference to the expected form and content of the auditor’s report.] The form and content of our report may need to be amended in the light of our audit findings. Please sign and return the attached copy of this letter to indicate your acknowledgement of, and agreement with, the arrangements for our audit of the financial statements including our respective responsibilities. XYZ & Co. Acknowledged on behalf of ABC Company by Appendix 2 (Ref: Para. A9) Determining the Acceptability of General Purpose Frameworks 1. Acceptable financial reporting frameworks normally exhibit the following attributes that result in information provided in financial statements that is useful to the intended users:
2. The auditor may decide to compare the accounting conventions to the requirements of an existing financial reporting framework considered to be acceptable. For example, the auditor may compare the accounting conventions to IFRSs. For an audit of a small entity, the auditor may decide to compare the accounting conventions to a financial reporting framework specifically developed for such entities by an authorised or recognised standards setting organization. When the auditor makes such a comparison and differences are identified, the decision as to whether the accounting conventions adopted in the preparation and presentation of the financial statements constitute an acceptable financial reporting framework includes considering the reasons for the differences and whether application of the accounting conventions, or the description of the financial reporting framework in the financial statements, could result in financial statements that are misleading. 3. A conglomeration of accounting conventions devised to suit individual preferences is not an acceptable financial reporting framework for general purpose financial statements. Similarly, a compliance framework will not be an acceptable financial reporting framework, unless it is generally accepted in the industry to which the entity belongs by preparers and users. Limited Revision Consequential to issuance of Standard on Auditing (SA) 210 (Revised), “Agreeing the Terms of Audit Engagements” The amendments to the following Standards on Auditing (SAs) have been shown in track change mode. SA 580 (Revised), “Written Representations” [No amendments are proposed to paragraphs 1-4] Objectives 5. The objectives of the auditor are:
[No amendments are proposed to paragraph 6.] Definitions 7. For purposes of this SA, references to “management” should be read as “management and, where appropriate, those charged with governance”. Furthermore, in the case of a fair presentation framework, management is responsible for the preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework; or the preparation of financial statements that give a true and fair view in accordance with the applicable financial reporting framework. [No amendments are proposed to paragraphs 8.] Written Representations about Management’s Responsibilities Preparation and Presentation of the Financial Statements 9. The auditor shall request management to provide a written
representation
that it has fulfilled its responsibility for the preparation and
presentation of the
financial statements in accordance with the applicable financial reporting Information Provided and Completeness of Transactions to the Auditor 10. The auditor shall request management to provide a written
representation
Description of Management’s Responsibilities in the Written Representations 11. Management’s responsibilities shall be described in the written representations required by paragraphs 9 and 10 in the manner in which these responsibilities are described in the terms of the audit engagement. (Ref: Para.A3) [No amendments are proposed to paragraphs 12-19 and A1.] Premise, relating to Management’s Responsibilities, on which an Audit is A2. Law or regulation may establish management’s responsibilities in relation to financial reporting. However, the extent of these responsibilities, or the way in which they are described, may differ under each law or regulation. Despite these differences, an audit in accordance with the SAs is conducted on the premise that management has responsibility:
A3. SA 210 (Revised) requires the auditor to obtain the agreement of management that it acknowledges and understands those responsibilities as a precondition for accepting the audit engagement35 by him. If management’s responsibilities prescribed by law or regulation are equivalent in effect to those described in paragraph A2, the auditor may use the wording of the law or regulation to describe them in the terms of the audit engagement36. [No amendments are proposed to paragraphs A4 – A8.] Written Representations about Management’s Responsibilities (Ref: Para. A9. Audit evidence obtained during the audit that management is fulfilling has fulfilled the responsibilities referred to in paragraphs 10 and 11 that it agreed to in the terms of the audit engagement is not sufficient without obtaining confirmation from management that it believes that it has fulfilled those responsibilities. This is because the auditor is not able to judge solely on other audit evidence whether management has prepared and presented the financial statements and provided information to the auditor on the basis of the agreed acknowledgement and understanding of its responsibilities. For example, the auditor could not conclude that management has provided the auditor with all relevant the information agreed in the terms of the audit engagement described in paragraph A2(b) without asking it whether, and receiving confirmation that, such information has been provided. [No amendments are proposed to paragraphs A10-A20.] Form of Written Representations (Ref: Para. 14) A21. Written representations are required to be included in a representation letter addressed to the auditor. Some laws or regulations may, however, require management to make a written public statement about its responsibilities. Although such statement is a representation to the users of the financial statements, or to relevant authorities, the auditor may determine that it is an appropriate form of written representation in respect of some or all of the representations required by paragraph 9 or 10. Consequently, the relevant matters covered by such statement need not be included in the representation letter. Factors that may affect the auditor’s determination include:
[No amendments are proposed to paragraphs A22-A27.] Written Representations about Management’s Responsibilities (Ref: Para. 19) A28. As explained in paragraph A9, the auditor is not able to judge solely
on
other audit evidence whether management has fulfilled the responsibilities
referred to in paragraphs 10 and 11. prepared and presented the financial
statements and provided information to the auditor on the basis of the
agreed
acknowledgement and understanding of its responsibilities. Therefore, if,
as
described in paragraph 19(a), the auditor concludes that the written representations about these matters are unreliable, or if management
does not
provide those written representations, the auditor is unable to obtain
sufficient
appropriate audit evidence. The possible effects on the financial
statements of
such inability are not confined to specific elements, accounts or items of
the
financial statements and are hence pervasive. [Proposed] SA 705 requires
the
auditor to disclaim an opinion on the financial statements in such [No amendments are proposed to paragraph A29 and Appendix 1.] Appendix 2 (Ref: Para. A23) Illustrative Representation Letter The following illustrative letter includes written representations that are required by this and other SAs in effect for audits of financial statements for periods beginning on or after as at [date]. It is assumed in this illustration that the applicable financial reporting framework is applicable accounting standards in India; the requirement of SA 570 (Revised)38 to obtain a written representation is not relevant; and that there are no exceptions to the requested written representations. If there were exceptions, the representations would need to be modified to reflect the exceptions. (Entity Letterhead)
This representation letter is provided in connection with your audit of the financial statements of ABC Company for the year ended March 31, 20XX39 for the purpose of expressing an opinion as to whether the financial statements are presented fairly, in all material respects, (or give a true and fair view) in accordance with the applicable accounting standards in India. We confirm that (to the best of our knowledge and belief, having made such inquiries as we considered necessary for the purpose of appropriately informing ourselves): Financial Statements
[No other amendments are proposed to Appendix 2.] SA 240 (Revised), “The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements” 39. The auditor shall obtain written representations from management and, where applicable, those charged with governance that:
A12. Management is responsible accepts responsibility for the entity’s internal control and for the preparation of the entity’s financial statements. Accordingly, it is appropriate for the auditor to make inquiries of management regarding management’s own assessment of the risk of fraud and the controls in place to prevent and detect it. The nature, extent and frequency of management’s assessment of such risk and controls may vary from entity to entity. In some entities, management may make detailed assessments on an annual basis or as part of continuous monitoring. In other entities, management’s assessment may be less structured and less frequent. The nature, extent and frequency of management’s assessment are relevant to the auditor’s understanding of the entity’s control environment. For example, the fact that management has not made an assessment of the risk of fraud may in some circumstances be indicative of the lack of importance that management places on internal control. ... A57. SA 580, “Management Representations40”, establishes requirements and provides guidance on obtaining appropriate representations from management and, where appropriate, those charged with governance in the audit. In addition to acknowledging its that they have fulfilled their responsibility for the preparation of the financial statements, it is important that, irrespective of the size of the entity, management and, where appropriate, those charged with governance acknowledge its their responsibility for internal control designed, implemented and maintained to prevent and detect fraud. A58. Because of the nature of fraud and the difficulties encountered by auditors in detecting material misstatements in the financial statements resulting from fraud, it is important that the auditor obtain a written representation from management and, where appropriate, those charged with governance confirming that it has they have disclosed to the auditor:
SA 540 (Revised), “Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures” 22. The auditor shall obtain written representations from management and, where appropriate, those charged with governance whether they management believes significant assumptions used by it in making accounting estimates are reasonable. (Ref: Para. A126-A127) SA 550 (Revised), “Related Parties” A16. The audit is conducted on the premise that management and, where appropriate, those charged with governance have acknowledged and understand that they have responsibility for the preparation and presentation of the financial statements in accordance with the applicable financial reporting framework, including where relevant their fair presentation, and for such. This includes the design, implementation and maintenance of internal control as management and, where appropriate, those charged with governance, determine is necessary to enable relevant to the preparation and presentation of financial statements that are free from material misstatement, whether due to fraud or error.41 Accordingly, where the framework establishes related party requirements, management, with oversight from those charged with governance, is responsible for the design, implementation and maintenance of adequate controls over related party relationships and transactions so that these are identified and appropriately accounted for and disclosed in accordance with the framework. In their oversight role, those charged with governance are responsible for monitoring how management is discharging its responsibility for such controls. Regardless of any related party requirements the framework may establish, those charged with governance may, in order to fulfill their oversight responsibilities, obtain information from management to enable them to understand the nature and business rationale of the entity’s related party relationships and transactions. SA 560 (Revised), “Subsequent Events” Management Responsibility Towards Auditor (Ref: Para. 10) A11. As explained in SA 210 (Revised), agreed in the terms of the audit engagement, include the agreement of management has a responsibility to inform the auditor of relevant facts that may affect the financial statements, of which management it may becomes aware during the period from the date of the auditor’s report to the date the financial statements are issued. SA 570 (Revised), “Going Concern” 16. When events or conditions have been identified that may cast significant doubt on the entity’s ability to continue as a going concern, the auditor shall obtain sufficient appropriate audit evidence to determine whether or not a material uncertainty exists through performing additional audit procedures, including consideration of mitigating factors. These procedures shall include: (Ref: Para. A15)
1 Published in the July, 2007 issue of the Journal. 2 Presently, SA 200, “Basic Principles Governing an Audit” and SA 200A, “Objective and Scope of an Audit of Financial Statements” correspond to International Standard on Auditing (ISA) 200 (Revised and Redrafted). Both the SAs are currently being revised in the light of the ISA 200 (Revised and Redrafted). Post revision, the principles covered by SA 200 (AAS 1) and SA 200A (AAS 2) will be merged into one Standard, i.e., SA 200. 3 Currently, SA
220 (AAS 17), “Quality Control for Audit Work”, issued in July 1999 by the
Institute of Chartered Accountants of India (ICAI) is in force. The
Standard is being revised in the light of the corresponding Revised
International Standard on Auditing (ISA) 220, “Quality Control for an
Audit 4 ISA 200, “Overall Objectives of the Independent Auditor and the Conduct of an Audit in accordance with International Standards on Auditing”, paragraph 13 (a) defines the applicable financial reporting framework as follows:
Presently, SA 200, “Basic Principles Governing an Audit”, issued in April 1985 and SA 200A, “Objective and Scope of an Audit of Financial Statements”, issued in April 1985, correspond to the International Standard on Auditing (ISA) 200 (Revised and Redrafted). Both the SAs are currently being revised in the light of the ISA 200 (Revised and Redrafted). Post revision, the principles covered by SA 200 (AAS 1) and SA 200A (AAS 2) will be merged into one Standard, i.e., SA 200 (Revised). 5 Paragraph 13 (j) of ISA 200 defines the Premise, relating to the responsibilities of management and, where appropriate, those charged with governance, on which an audit is conducted as follows:
6 Accounting
Standards promulgated by Accounting Standards Board (ASB) of the ICAI or
Accounting Standards, notified by the Central Government by publishing the
same as the Companies (Accounting Standards) Rules, 2006, or the
Accounting Standards for Local Bodies promulgated by the Committee on
Accounting Standards for Local Bodies (CASLB) of the ICAI, as 7 At present,
there is no separate Standard on Auditing (SA) corresponding to
International Standard on Auditing (ISA) 705, “Modifications to the
Opinion in the Independent Auditor’s Report”. 8 At present,
there is no separate Standard on Auditing (SA) corresponding to
International Standard on Auditing (ISA) 706, “Emphasis of Matter
Paragraphs and Other Matter Paragraphs in the Independent Auditor’s
Report”. However, the concept of ‘emphasis of matter paragraph’ has been
discussed in SA 700, “The Auditor’s Report on Financial Statements”,
issued by ICAI in January 2003. The Auditing and Assurance Standards Board
(AASB) has issued the Exposure Drafts of Revised SA 700, “Forming an
Opinion and Reporting on Financial Statements”; SA 705, “Modifications to
the Opinion in the Independent Auditor’s Report”; and SA 706, “Emphasis of
Matter 10 See paragraph 43 of the Exposure Draft of Revised SA 700, “Forming an Opinion and Reporting on Financial Statements”. The Exposure Draft has been published in June, 2009 issue of the Journal of ICAI. 11 “Framework for Assurance Engagements,” paragraph 16. 13 “Framework for Assurance Engagements,” paragraph 16(b)(ii). 14 At present, there is no corresponding SA issued by ICAI on the subject. The AASB has, however, already initiated a project on formulation of SA corresponding to International Standard on Auditing (ISA) 800, “Special Considerations-Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks”. Meanwhile, attention of the readers is also drawn to the “Guidance Note on Audit Reports and Certificates for Special Purposes” issued by ICAI in March, 1984. 15 Paragraph A2 of ISA 200 provides as follows:
16 SA 580 (Revised), “Written Representations,” paragraphs 10-11. 17 SA 580 (Revised), paragraph A28. 18 SA 315, “Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its Environment,” paragraph A42. 19 SA 315 (Revised), paragraph A47 and Appendix 1. 20 In the paragraphs that follow, any reference to an audit engagement letter is to be taken as a reference to an audit engagement letter or other suitable form of written agreement. 22 See paragraph 15 of the Exposure Draft of Revised SA 700, “Forming an Opinion and Reporting on Financial Statements”, which includes a requirement regarding the evaluation of whether the financial statements adequately refer to or describe the applicable financial reporting framework. The Exposure Draft is published in the June, 2009 issue of the Journal of ICAI. 23 ISA 200, “Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards on Auditing”, paragraph 20, states as under:
Presently, SA 200, “Basic Principles Governing an Audit”, issued in April 1985 and SA 200A, “Objective and Scope of an Audit of Financial Statements”, issued in April 1985, correspond to the International Standard on Auditing (ISA) 200 (Revised and Redrafted). Both the SAs are currently being revised in the light of the ISA 200 (Revised and Redrafted). Post revision, the principles covered by SA 200 (AAS 1) and SA 200A (AAS 2) will be merged into one Standard, i.e., SA 200 (Revised). 25 The addressees and references in the letter would be those that are appropriate in the circumstances of the engagement, including the relevant jurisdiction. It is important to refer to the appropriate persons – see paragraph A21. 26 Throughout this letter, references to “you”, “we”, “us”, “management”, “those charged with governance” and “auditor” would be used or amended as appropriate in the circumstances. 27 Where the financial statements of the entity include financial statements/ information of its component(s) which have been audited by another auditor/ auditors, the engagement letter may be modified as under:
Further, as informed by you, the financial statements of the components of
ABC Company Limited, viz., PQR Company Limited and XYZ Company Pvt
Limited, whose financial information/ financial statements have been
included in the financial statements of ABC Company would be/ have been 28 Use terminology as appropriate in the circumstances. 29 Or, if appropriate, “For the preparation and fair presentation of the financial statements in accordance with the Financial Reporting Standards”. 30 For example, “Our fees will be billed as the work progresses”. 31 Partner or proprietor, as the case may be. 32 SA 210 (Revised), “Agreeing the Terms of Audit Engagements”, paragraph 6(b)(i). 33 SA 210 (Revised), paragraph 6(b)(iii). 34 SA 200, “Basic Principles Governing an Audit” (earlier known as AAS1), refer paragraphs 18 and 19. The Standard is being revised in the light of the corresponding International Standard. 37 [Proposed] SA 705, paragraph [12]. 38 Revised SA 570, “Going Concern”. 39 Where the auditor reports on more than one period, the auditor adjusts the date so that the letter pertains to all periods covered by the auditor’s report. 40 Revised Standard on Auditing (SA) 580, “Written Representations”.
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