AUD, Auditing and Attestation
Sources for Terms of Engagement
Last reviewed
The standards and authorities behind PocketCPA's AUD lessons on Terms of Engagement. The topic rests on AU-C 210.
About this topic
An audit is a contract before it is a procedure. Two parties sign that contract, and one of them prepares the numbers the other will report on.
The question this Topic answers. On what terms may an auditor take an engagement at all, what must those terms say, and what happens when the client asks to change them once the work is under way?
Key points
- The auditor establishes the terms of the engagement through an engagement letter agreed to by management.
- Management must agree to the premise of the audit: responsibility for the statements, internal control, and access to information.
- The engagement letter must be updated when there is a change in the nature or scope of the engagement.
- A request to change the engagement to a lower level of service requires the auditor to assess whether there is reasonable justification.
What the lessons cover
- Preconditions for an audit
- The engagement letter
- Changes in the terms
- Scope limitations imposed in the proposed terms
- Issuers: AS 1301 and the audit committee
Authoritative references
Where these requirements sit in the literature.
- AU-C 210.06, the premise: management's acknowledgment of its responsibility for the preparation and fair presentation of the statements under the applicable framework, for the internal control relevant to preparing statements free from material misstatement, and for access to all relevant information and to persons within the entity.
- AU-C 210.07, the pre-acceptance scope limitation: a limitation imposed in the terms of a proposed engagement that the auditor believes will result in disclaiming an opinion means the auditor should not accept it as an audit engagement, unless required by law or regulation.
- AU-C 210.08, absent preconditions: discuss with management, and unless required by law or regulation, do not accept when the framework is not acceptable.
- AU-C 210.10, the agreed terms:
- objective and scope.
- the auditor's responsibilities.
- management's responsibilities.
- the inherent limitations of an audit and of internal control.
- identification of the applicable framework.
- the expected form and content of any reports, plus a statement that a report may differ from it.
- AU-C 210.16, recurring audits: assess whether circumstances require the terms to be revised, and where they need not be, remind management of the terms and document the reminder. The reminder is required on that branch rather than left to judgment. No annual letter is required, but a change in senior management, ownership, the nature or size of the entity, legal or regulatory requirements, or the framework may make one appropriate.
- AU-C 210.17, a change in the terms: no agreement without reasonable justification. Changed requirements or a misunderstanding about the service is reasonable; avoiding a qualified or adverse opinion, or precluding sufficient appropriate evidence, is not. Barred from continuing, withdraw where possible and determine any obligation to report the circumstances to those charged with governance, owners or regulators.
- AU-C 210.19, the changed engagement: agree on and document the new terms. The report guidance is separate and is not a requirement of AU-C 210: .A44 says the report would not reference the original engagement or its procedures, except where the engagement becomes an agreed-upon-procedures engagement.
- PCAOB AS 1301.
- .01 (the understanding is with the audit committee, recorded in a letter).
- .04 (significant issues discussed with management on appointment or retention).
- .05 (objective, auditor's responsibilities, management's responsibilities).
- .06 (annual provision to the audit committee, execution for the company, the committee's acknowledgment where another party signs).
- .07 (decline to accept, continue, or perform).
- .23 (significant difficulties, including unreasonable management restrictions, as a possible scope limitation).
- Appendix C (the letter's contents, written separately for an integrated audit, with footnote 1 barring indemnification provisions for issuer audits).
- .C2 (interim review terms).
- PCAOB AS 3105.
- .05 (client-imposed or circumstance-imposed restrictions may require a qualification or a disclaimer, reasons described in the report).
- .06 (the choice turns on the importance of the omitted procedures).
- .07 (significant client-imposed restrictions, ordinarily disclaim).
- AU-C 705 for the opinion a scope limitation produces on the nonissuer side, and AU-C 260 for the communications a withdrawal or a refused change may trigger.
How PocketCPA uses these sources
Every lesson is written in original words and cites the paragraph each rule comes from. No standard's text is reproduced. How lessons and questions are written and checked is set out in our methodology.