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4.22.1 Resolving differences of opinion
4.22.2 There are a number of possible situations which could result in differences in
opinion:
Differences within the engagement team.
Differences between the engagement partner and the engagement quality control
reviewer.
Differences between the engagement partner and those consulted.
Difference within the firm on how to deal with a particular technical issue that affects a
cross-section of engagements.
Differences between the engagement partner and the client.
4.22.3 If differences of opinion arise within the engagement team, with those consulted or,
where applicable, between the engagement partner and the engagement quality control
reviewer, the engagement team shall follow the firm’s policies and procedures for dealing
with and resolving differences of opinion.
4.22.4 The audit report should not be issued until all differences of opinion are satisfactorily
resolved. This could involve the use of another practitioner who possesses the relevant
experience and has the independence to make appropriate recommendations.
4.22.5 All differences in opinion should be sufficiently documented to enable an
understanding of the issue on which the difference arose, the person consulted, the results
of the consultation and the basis on which the difference was resolved.
Part I of the Manual contains Form 320 - Consultations and Conclusions, which should be
used to record all consultations and the conclusions therefrom.
4.22.6 If differences of opinion arise within the engagement team, with those consulted or,
where applicable, between the engagement partner and the engagement quality control
reviewer, the engagement team shall follow the firm’s policies and procedures for dealing
with and resolving differences of opinion.
4.22.7 These policies and procedures are included in the firm’s Quality Control Manual.
4.23. Monitoring
4.23.1 At least annually the firm conducts a formal monitoring process. This is discussed
with all relevant team members at team meetings, and appropriate follow-up action
implemented. The quality control committee/partner, in conjunction with all partners, is
responsible for implementing enhancements of the system. This process will include
considering the relevance, adequacy and effectiveness of the firms policies and procedures
4.23.2 The firm also has internal and external inspection programs (sometimes referred to
as “Peer Review Programmes” or “Quality Assurance Programmes”) for its audit division.
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Engagement Inspection - Internal
4.23.3 At least annually the firm also conducts an internal inspection programme. This is
discussed with all relevant team members at team meetings, and appropriate follow-up
action implemented. The quality control committee/partner, in conjunction with all partners,
is responsible for implementing enhancements of the system. This process will include
considering the relevance, adequacy and effectiveness of the firms policies and procedures
4.23.4 The internal inspection programme requires that at least once annually, selected
engagements from partners in the firm are subject to an independent review (sometimes
referred to as a “cold review”). The aim of the inspection is to provide reasonable
assurance that the policies and procedures relating to the conduct of an audit are operating
effectively and complied with in practice by each engagement partner who is involved in
audit and assurance service. Each partner should be reviewed at least once every three
years.
4.23.5 The review should be undertaken by another partner or a senior member of the firm
who has not been involved in the engagement at any level and who has sufficient and
appropriate knowledge to carry out the review.
4.23.6 Inspection programmes include the selection of engagement files for review by a
suitably qualified person independent of the preparation of the engagement file,
4.23.7 In determining the scope of inspections, the firm may take into account the scope or
conclusions of other internal and external inspection programmes; however external
inspection programmes cannot be a substitute for the firm’s own monitoring programme.
4.23.8 In all of these programmes, the engagement partner, engagement quality control
reviewer and others involved in performing the engagement are not to be involved in the
inspection of a file.
4.23.9 The engagement review checklist to assist in carrying out the review is available on
the HLB International GCS under the quality assurance section.
External quality assurance programmes
4.23.10 In addition to the inspection programmes referred to in 4.23.3 above, the audit
division may participate in a number of other quality assurance programmes.
4.23.11 If the firm is a member of a federation, it may participate in a federation quality
assurance review programme. This programme involves an inspection on a cyclical basis
of the audit practice of each firm conducted by experienced audit partners of other member
firms of the federation. The files to be reviewed are selected by the reviewers, taking into
account the nature of the engagements, the risks involved with the engagements, the
profile of the clients, and the complexity of the engagements. The review covers:
Compliance with International Standards on Auditing;
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Compliance with legislation and other regulatory requirements;
Compliance with the firm’s quality control procedures in relation to audit
engagements, including the HLBI Audit Manual; and
Whether the opinion issued is appropriate, and supported by sufficient audit
evidence.
4.23.12 HLBI member firms also participate in the HLB International quality assurance
programme. Detailed policies and procedures for this program are included on the HLBI
website. The Programme has a 3 year cycle.
4.23.13 Other external regulators and professional bodies may also conduct a quality
assurance programme on a cyclical basis.
4.23.14 Reports received by the firm as a result of the HLBI , federation, professional body
and regulator reviews described above are considered by the firm, and referred to the audit
department to determine what corrective action, if any, is required to the department’s
quality control system, and to implement changes required.
4.24. Documentation
The audit team
4.24.1 The audit team shall include in the audit documentation the following, to document
quality control:
Issues identified with respect to compliance with relevant ethical requirements and
how they were resolved;
Conclusions on compliance with independence requirements that apply to the audit
engagement, and any relevant discussions with the firm that support these
conclusions;
Conclusions reached regarding the acceptance and continuance of client
relationships and audit engagements; and
The nature and scope of, and conclusions resulting from, consultations undertaken
during the course of the audit engagement.
The engagement quality control reviewer
4.24.2 The engagement quality control reviewer records the following, to document quality
control:
That the procedures required by the firm’s policies on engagement quality control
review have been performed;
That the engagement quality control review has been completed on or before the
date of the auditor’s report; and
That the reviewer is not aware of any unresolved matters that would cause
the reviewer to believe that the significant judgments the engagement team
made and the conclusions it reached were not appropriate.
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APPENDIX I: ANNUAL INDEPENDENCE CONFIRMATION
Objective: To obtain reasonable assurance that all partners and staff required to be
independent by the COE have complied with the firm’s policies and procedures on
independence.
Yes / No
1. Have you any court judgement against you in the last ten years (excluding
motoring offences), been declared bankrupt or entered into a voluntary
arrangement with your creditors, been disqualified from being a director or acting
in the management affairs of a company?
2. Have you been investigated for professional misconduct, subject to disciplinary
procedures by a professional body, reprimanded, excluded, disciplined or
publicly criticised by a professional or regulatory body?
3. Do you or any members of your family (spouse or equivalent, dependents,
parents, non-dependent child or siblings) have a family or personal relationship
with directors or employees in positions of influence in the firm’s clients?
4. Do you or any member of your family (spouse or equivalent, dependents,
parents, non-dependent child or siblings) have a direct financial interest or
material indirect financial interest in any of the firm’s clients?
5. Do you or any member of your family (spouse or equivalent, dependents,
parents, non-dependent child or siblings) hold shares on trust for any of the firm’s
clients?
6. Have you or any member of your family (spouse or equivalent, dependents,
parents, non-dependent child or siblings) received any financial support or any
benefit from any of the firm’s clients?
N.B.: This includes loans, grants and gifts of significant value of over CU
and any other financial support, either directly or indirectly.
7. Have you accepted goods or services on favourable terms or received undue
hospitality from a client?
8. Are you aware of any conflicts of interest that an engagement may create with
any of the firm’s existing clients?
9. Do you provide any services to any of the firm’s clients directly or indirectly
through your family (spouse or equivalent, dependents, parents, non-dependent
child or siblings) or other business associates?
10. Do you have any potential employment with, or have you been employed in the
last two years by any of the firm’s clients?
If the answer to any of the above questions is yes, or if you are aware of any other threats to
your independence, provide full details including the client names in the space below or as
an attachment.
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I confirm that I and my family (spouse or equivalent, dependents, parents, non-dependent child or
siblings) have, except where noted above, complied with all requirements of the firm’s independence
policies and that the above details are correct to the best of my knowledge and based on the
information I have to the date of this declaration. I undertake to keep the firm fully informed of any
changes, within a week of them arising. I also acknowledge that I am fully aware that the firm has the
right to take disciplinary and other appropriate action if any of the declaration above turns out to be
false.
Name:___________________________Signature:_____________________Date:_____________
_
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5. AUDIT ENGAGEMENT (INCORPORATING ISQC 1, ISA 210 and 220)
5.1. Prior to commencing an engagement
5.1.1 A number of processes are required before commencing an engagement. These
processes apply to:
Accepting a new client
Deciding whether to continue an existing engagement, and
Considering acceptance of a new engagement with an existing client.
5.1.2 The HLBI quality control manual sets out policies and procedures in relation to these
matters. The HLBI audit manual should be read in conjunction with the HLBI quality control
manual, or other quality control manual used by the firm.
5.1.3 For the purpose of this Chapter, references to “management” should be read as
referring to “management and, where appropriate, those charges with governance.”
5.2. Client acceptance
5.2.1 Prior to accepting an audit engagement, the firm should consider:
The integrity of the principal owners, key management and those charged with
governance;
Whether the engagement team is competent to perform the audit engagement and has
the necessary capabilities, including time and resources;
Whether the firm and the engagement team can comply with relevant ethical
requirements which include:
• Integrity,
• Objectivity,
• Competence,
• Confidentiality and
• Professional behaviour.
5.2.2 The firm should obtain such information as it considers necessary before making a
decision to accept a new engagement.
There must be evidence that the engagement partner has formed a conclusion on
compliance with independence requirements including:
• Identifying and evaluating circumstances that create threats to independence.
• Evaluating identified threats.
• Taking action to eliminate threats or reduce them to an acceptable level by applying
safeguards, or declining the appointment.
5.2.3 In addition to the above considerations, engagements may need to be declined
where:
An entity is operating in a specialised industry in which the auditor lacks the required
expertise, and expert assistance is not available.
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An entity operates a significant operation where the firm is not represented, and there
are no alternative audit procedures that can be adopted to cover these operations.
The entity reporting deadlines coincide with existing client pressures.
An Engagement Quality Control Review is required and no suitably qualified and
objective reviewer is available.
5.2.4 The information the firm obtains may come from:
Communication with previous or existing providers of professional accountancy services
to the client, and discussions with other third parties.
Inquiry of other firm personnel or third parties such as bankers, legal counsel and
industry peers.
Background searches of relevant databases.
5.2.5 It is vital that the firm is not exposed to the risk of its reputation or future profitability
by accepting new clients without proper vetting procedures. To adhere to the COE and in
particular, the aspect of client confidentiality, the firm should inform the entity that it will
seek information from certain persons as noted above.
5.2.6 Where issues arise out of any of these considerations, the engagement team should
undertake appropriate consultation in accordance with Chapter 4 of this Manual. The Client
Acceptance Questionnaire is set out as Form 405 in Part I of the Manual. This should be
completed at the acceptance stage.
5.2.7 In addition to the requirements above, the firm should make sure that prior to
accepting the appointment:
It has confirmed that the provisions of the relevant statutory provisions relating to
appointment of auditors have been complied with by, for example, discussing the matter
with the prospective client.
Where a change of auditors is proposed, with the firm to be appointed, then under the
COE:
• The entity should communicate with the outgoing auditor giving him permission to
communicate with us. Where necessary, the firm should inform the entity that it
cannot accept an engagement until satisfactory communication has been received
from the outgoing auditor.
• The firm should write to the outgoing auditor for professional clearance, and request
appropriate information required to enable the firm to conclude whether or not to
accept the engagement. Where no reply is received from the outgoing auditor, the
firm should send a reminder within a reasonable period indicating that if they do not
hear from the outgoing auditor within a certain time, they will accept the engagement
on the assumption that there are no professional reasons as to why they should not
accept the engagement. In those circumstances the firm should also try to obtain
information about any possible threats by other means such as through inquiries of
third parties or background investigations on senior management or those charged
with governance of the client.
• Once the reply is received, or where one is not received after the reminder and other
information is obtained, the firm should consider whether it wishes to accept the
engagement.
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• Where the entity’s permission for the existing auditor to communicate with the
proposed auditor is not given, or where the existing auditor has given professional
reasons as to why the proposed auditor should not accept the appointment, the firm
should evaluate the circumstances and consider declining the appointment.
The COE and local legal and ethical requirements need to be considered when the
existing auditor considers responding to the proposed auditor on whether there are any
professional reasons as to why the proposed auditor should not accept the
appointment. Such communication can only be undertaken after the existing accountant
receives the entity’s permission to communicate with the proposed auditor. If such
permission to communicate with the proposed auditor is not received by the existing
auditor from the client, than that fact should be disclosed by the existing auditor to the
proposed auditor.
Additional considerations in client acceptance
Financial reporting standards supplemented by law or regulation
5.2.8 If financial reporting standards established by an authorised or recognised standards
setting organisation 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:
The additional requirements can be met through additional disclosures in the financial
statements; or
The description of the applicable financial reporting framework in the financial
statements can be amended accordingly.
5.2.9 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 ISA 705.
Financial reporting framework prescribed by law or regulation
5.2.10 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:
Management agrees to provide additional disclosures in the financial statements
required to avoid the financial statements being misleading; and
It is recognized in terms of the audit engagement that the auditors report will
incorporate an Emphasis of Matter paragraph, drawing user’s attention to the additional
disclosures and unless the auditor is required by law or regulation to express the
auditor’s opinion by using the phrases “present fairly, in all material respects,” or “give a
true and fair view” in accordance with the applicable financial reporting framework, the
auditor’s opinion on the financial statements will not include such phrases.
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5.2.11 If the conditions in the paragraph above are not present and the auditor is required
by law or regulation to undertake the audit engagement, the auditor shall:
Evaluate the effect of the misleading nature of the financial statements on the auditor’s
report; and
Include appropriate reference to this matter in the terms of the audit engagement.
Auditor’s report prescribed by law or regulation
5.2.12 In some cases law or regulation of the relevant jurisdiction prescribes the layout or
wording of the auditor’s report in a form or in terms that are significantly different from the
requirement of ISAs. In these circumstances the auditor shall evaluate:
Whether users might misunderstand the assurance obtained from the audit of the
financial statements and, if so
Whether additional explanation in the auditor’s report can mitigate possible
misunderstanding.
5.2.13 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 ISAs. Accordingly, the auditor shall not include any
reference within the auditor’s report to the audit having been conducted in accordance with
ISAs.
5.3. Terms of audit engagement and changes thereto
Objectives
5.3.1 The objective of the auditor is to accept or continue an audit engagement only when
the basis upon which it is to be performed has been agreed, through
Establishing that the pre-conditions for audit are present, and
Confirming that there is a common understanding between the auditor and
management and, where appropriate, those charged with governance of the terms of
the engagement.
5.3.2 Preconditions for audit means:
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 the audit is to be conducted.
5.3.3 To establish whether these pre-conditions are present, the auditor shall”
Determine whether the financial reporting framework to be applied in the preparation of
the financial statements is acceptable; and
Obtain the agreement of management that it acknowledges and understands its
responsibility:
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• For the preparation of the financial statements in accordance with the applicable
financial reporting framework, including where relevant fair presentation;
• For such internal control as management determines is necessary to enable the
preparation of financial statements that are free from material misstatement, due to
fraud or error; and
• To provide the auditor with:
o Access to all information of which management is aware that is relevant to
the preparation of the financial statements such as records,
documentation, and other matters;
o Additional information that the auditor may request from management for
the purpose of the audit.
o Unrestricted access to persons within the entity from whom the auditor
determines it necessary to obtain audit evidence.
Limitation on scope prior to acceptance
5.3.4 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.
5.3.5 If the preconditions for 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
5.3.6 The auditor shall agree the terms of the audit engagement with management or those
charged with governance, as appropriate. 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 law or regulation.
5.3.7 The agreed terms of the audit engagement shall be included in the audit engagement
letter or other suitable form of written agreement and shall include:
The objective and scope of the audit of the financial statements;
The responsibilities of the auditor;
The responsibilities of management;
Identification of the applicable financial reporting framework for the preparation of the
financial statements; and
Reference to the expected form and content of any reports to be issued by the auditor
and a statement that there may be circumstances in which a report may differ from its
expected form and content.
5.3.8 If law and regulation prescribes in sufficient detail the terms of the audit engagement
referred to in paragraph above, the auditor need not record them in a written agreement,
except for the fact that such law or regulation applies and that management acknowledges
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and understands its own responsibilities. If law and regulation also prescribes
responsibilities of management, for such responsibilities that are equivalent the auditor may
use the wording of the law or regulation to describe them in the written agreement.
Recurring audits
5.3.9 On recurring audits, the auditor shall assess whether circumstances require the terms
of engagement to be revised and whether there is a need to remind the entity of the
existing terms of the audit engagement, for example:
Any indication that the entity misunderstands the objective and scope of the audit.
Any revised or special terms of the audit engagement.
A recent change in senior management.
A significant change in ownership.
A significant change in the nature or size of the entity’s business.
A change in legal or regulatory requirements.
A change in the financial reporting framework adopted in the preparation of the
financial statements.
A change in other reporting requirements.
Acceptance of a change in the terms of the audit engagement
5.3.10 The auditor shall not agree to a change in the terms of the audit engagement when
there is no reasonable justification for doing so. 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
engagement.
5.3.11 In contrast a change may not be considered reasonable if it appears to relate to
information that is incorrect, incomplete or otherwise unsatisfactory. An example might be
where the auditor is unable to obtain sufficient appropriate 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.
5.3.12 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. The auditor may need
to assess any legal or contractual implications of the change. The report on new service
would not include reference to the original audit engagement or any procedures that had
been performed in the original audit engagement, except where the audit engagement is
changed to an engagement to undertake agreed-upon procedures and thus reference to
the procedures performed is a normal part of the report.
5.3.13 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.
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5.3.14 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:
Withdraw from the audit engagement where possible under applicable law or
regulation; and
Determine whether there is any obligation, contractual or otherwise, to report the
circumstances to other parties, such as those charged with governance, owners or
regulators.
5.3.15 A specimen audit engagement letter is set out in Appendix I of this chapter, and also
at Form 416 in section I. This needs to be tailored to each firm’s requirement.
5.4. Continuation
5.4.1 The procedures for continuation of client relationship are similar to client acceptance.
The risks referred to under client acceptance should be kept under continuous review,
particularly in the early years of a client relationship as the extent of knowledge a firm will
have regarding the integrity of the client will generally grow within the content of an ongoing
relationship.
5.4.2 The risks and rewards of continuation must be considered at the planning stage and
at the completion stage.
5.4.3 The engagement partner may or may not have initiated the client acceptance and
continuation process regarding the engagement client. Regardless of this, it is the
responsibility of the engagement partner to determine whether the most recent decision
remains appropriate.
5.4.4 In deciding whether to continue a client relationship, the firm needs to consider
significant matters that may have arisen during the year and their implication on the audit.
These could include:
Changes in the client’s business through expansion into areas where the firm does not
possess the necessary knowledge or expertise.
Additional information on the integrity of the principal owners, key management and
those charged with governance, including changes in key management, governance
and shareholding, which place a doubt on integrity.
Changes in circumstances which reduce the independence of the engagement team.
Changes in legal, professional and regulatory requirements which the client is unwilling
to comply with.
Outstanding fees or undue pressure to reduce fees or the scope of work.
5.4.5 An Engagement Continuation Questionnaire is set out as Form 410 in Part I of the
Manual. This should be completed for each year, preferably after conclusion of an audit, to
ensure that significant matters in relation to continuation have been considered prior to the
continuation.
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5.5. Ceasing to act
5.5.1 Where the firm ceases to act for an assurance client, whether at the request of the
client or as a result of a decision taken by the firm, it must carry out the procedures which
ensure compliance with any legal requirements, with the ethical requirements set out in the
COE, with requirements of professional bodies and any other relevant requirements.
5.5.2 Where the engagement partner identifies significant matters that cast a doubt on the
continuation of the engagement or where the partner obtains information that would have
led to the firm declining the engagement if the information had been available earlier, the
engagement partner should discuss the matter with client management. The engagement
partner should document the withdrawal from the engagement, or from the client
relationship and the engagement, and the reasons for the withdrawal
5.5.3 In addition to ceasing to act as the auditor due to resignation from an existing
engagement or not seeking re-appointment, the firm could also cease to act by virtue of
being removed from office by the shareholders.
In cases where the firm ceases to act due to resignation from an existing engagement
or not seeking re-appointment, the firm should inform the management of this decision,
and consider whether there is any obligation, either contractually or otherwise, to report
to shareholders, those charged with governance and regulatory bodies on the
circumstances necessitating the withdrawal from the engagement or resignation. It may
be appropriate to obtain legal advice on such communication.
In cases where it is removed from office by the shareholders, it should consider whether
to attend the annual general meeting where it is to be removed and report on
circumstances that led to its removal. This may be necessary where the firm is removed
from office due to not complying with unreasonable demands of the management, those
charged with governance or the shareholders. It may be appropriate in such cases to
obtain legal advice.
5.5.4 In all these instances, the outgoing auditor is likely to be contacted by the new
auditor, who may require professional clearance or release of information or
documentation. In all cases, the firm should adopt a professional approach in providing the
relevant information. All such information or documentation should only be released to the
new auditor after obtaining the relevant written authority from the entity to provide the new
auditor with the information and documentation.
5.5.5 Where such authority is denied or limited by the client, the fact should be disclosed to
the incoming auditor.
5.5.6 Where the firm has professional or other reasons as to why the incoming auditor
should not accept the appointment, it should inform the incoming auditor of this. It may be
prudent to discuss the reasons with the client, and where appropriate, seek legal advice.
5.5.7 In providing information and documentation to the new auditor, the firm should
consider:
Whether the information and documentation belongs to the firm or the entity.
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Whether the firm has a lien on the client documentation due to outstanding fees.
The risk to the firm in releasing documentation that belongs to the firm.
5.5.8 However, the fact that fees are owing to the existing auditor is not a professional
reason for not providing professional clearance.
5.6. Non-audit engagements
5.6.1 The firm may provide other services to an audit client provided that this does not
compromise the firm’s independence as auditors. The requirements of relevant legislation
and of the COE must be considered before accepting an engagement to provide other
services to an audit client.
5.6.2 Where the acceptance of an appointment to provide other services creates threats to
independence, the same procedures as for new engagements should be followed, ie
evaluate the threats, and determine whether it is possible to apply appropriate safeguards.
5.6.3 In evaluating independence the firm should consider that relying heavily on a
particular entity for its fee income may create a threat to independence. Where other
services are provided, it is recommended that an engagement letter should be issued for
each of the other services, whether as a separate letter or as part of the audit engagement
letter.
5.6.4 The COE requires that where the firm is requested by an entity to provide services
which are clearly distinct from the services being provided by the existing auditor, the firm
should inform the entity of the professional obligation to communicate with the existing
auditor and should do so advising, in writing, of the approach made by the client and the
general nature of the request as well as seeking all relevant information, if any, necessary
to decide whether or not to accept the engagement.
5.6.5 Where the entity insists that the existing auditor should not be informed, the firm
should decide whether the client’s reasons are valid enough not to communicate with the
existing auditor.
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APPENDIX I: SPECIMEN AUDIT ENGAGEMENT LETTER
Date
The directors
.…………………………. Ltd.
Address
Town, Country
Dear Sirs,
SPECIMEN AUDIT ENGAGEMENT LETTER
[We are pleased to confirm our acceptance and our / The purpose of this letter is to reconfirm our/ As it
has been some time since we agreed the terms of our engagement, we consider it appropriate to
reconfirm our / As there have been some changes in your Board/Senior Management/organisation we
consider it appropriate to reconfirm our] understanding of this audit engagement by means of this letter
and the attached Standard Terms of Business which outlines the terms of our engagement as auditors of
[NAME OF ENTITY] (“the Company”), your obligations and the fee arrangements.
1. [Name of Entity Conducting the Audit]
1.1. Written consent to our appointment as auditors [is hereby / has previously been] given in
accordance with the [identify legislation etc] (“the Act”) by the [Name of Entity Conducting the
Audit], which will conduct an audit and provide an independent audit opinion on the
[consolidated] financial statements.
1.2. Other non-assurance services that you have requested, or may request in the future, will be
provided by [Name of Practice Company].
1.3. Further information on the entities involved in providing our services to you are included in the
attached Standard Terms of Business.
2. Objective and Scope of the Audit of the Consolidated Financial Report
2.1. You have requested that we audit the [consolidated] financial statements of the Company,
which comprise the statement of financial position as at [Balance Date], the income statement
[IF PROVIDED], the statement of profit or loss and other comprehensive income, the statement
of changes in equity and the statement of cash flows for the year then [ended/ing], a summary
of significant accounting policies and other explanatory information, and the directors’
declaration, for the [consolidated] entity, consisting of [the Company]and the entities it
controlled at the end of, or during, the year ended/ing [Balance Date].
2.2. Our audit will be conducted with the objective of expressing an opinion on the [consolidated]
financial statements.
2.3. Responsibilities of the Auditor
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2.3.1. We will conduct our audit in accordance with [identify] Auditing Standards (eg International
Standards on Auditing). 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.
2.3.2. 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 an 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.
2.3.3. There are inherent limitations in any audit, and these include the use of sample testing, the
inherent limitations of any internal control structure, the possibility of collusion to commit
fraud and that most audit evidence is persuasive rather than conclusive. Consequently, 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 [identify] Auditing Standards.
2.3.4. In making our risk assessments, we consider internal control relevant to the Company’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 Company’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 identify during the audit.
2.3.5. Our audit is designed to identify and assess the risk of material misstatement. The concept of
materiality affects our audit planning and our consideration of matters arising from our audit.
We take into account both qualitative and quantitative factors when assessing materiality.
2.3.6. We have a statutory responsibility to:
(a) form an opinion, and report on, whether or not the general purpose financial statements
presented to us by Directors is in accordance with the Act and that it:
• gives a true and fair view of the [consolidated] entity’s financial position and
performance; and
• complies with [Identify] Accounting Standards, and
(b) form an opinion about:
• whether we have been given all the information, explanations and assistance
necessary to conduct our audit;
• whether you have kept financial records sufficient to enable the financial statements
to be prepared and audited;
• whether you have kept other records and registers required by the Act; and
• to report any deficiency, failure or shortcoming in relation to those matters.
2.3.7. Auditing Standards require us to appoint an Engagement Partner who shall take overall
responsibility for the planning and conduct of the audit, and for the report that is issued on
behalf of [Name of Entity Conducting the Audit]. We have assessed the professional
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requirements of this assignment and [Name of Partner] will act as Engagement Partner for the
audit and will be responsible for the conduct of the audit.
2.4. Responsibilities of Directors, Management and Others Charged with Governance
2.4.1. Our audit will be conducted on the basis that Directors of the Company (“Directors”), its
management and, where appropriate, others charged with its governance acknowledge and
understand that they have responsibility:
(a) for the preparation of financial statements that give a true and fair view in accordance
with the Act and [Identify] Accounting Standards. If compliance with those Standards
will not give a true and fair view, Directors must add such information and explanations
that will give a true and fair view. As Directors you must not approve the financial
statements unless you are satisfied that they give a true and fair view of the assets,
liabilities, financial position and surplus or deficit of the company.
(b) in preparing those financial statements:
(i) to select suitable accounting policies and then apply them consistently
(ii) to make judgements and accounting estimates that are reasonable and prudent; and
(iii) to prepare the financial report on the going concern basis unless it is inappropriate
to presume that the Company will continue in business.
(c) to maintain accounting records which correctly record and explain the [consolidated]
entity’s transactions and financial position;
(d) for ensuring compliance with [VAT/GST amend as appropriate] and other taxation
legislation to the extent required by that legislation;
(e) for such internal control as Directors, management and others charged with governance
determine is necessary to enable the preparation of financial statements that are free from
material misstatement, whether due to fraud or error; and
(f) to provide us with:
(i) access to all information of which Directors, management and others charged with
governance are aware that is relevant to the preparation of the financial
statements, such as records, documentation and other matters;
(ii) additional information that we may request from Directors, management and
others charged with governance for the purpose of the audit;
(iii) unrestricted access to persons within the [consolidated] entity from whom we
determine it necessary to obtain audit evidence; and
(iv) reasonable working space and clerical assistance.
(g) for safeguarding the assets of the company and for taking reasonable steps to ensure that
the Company's activities are conducted honestly.
(h) for evaluating the overall presentation, structure and content of the financial statements,
including the disclosures, and whether the financial statements represent the underlying
transactions and events in a manner that achieves a fair presentation.
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3. Components Audited by another Auditor
3.1. The financial information of [Name of component] (“the Component”), [a wholly-owned/partly
owned] subsidiary of [Name of Company], [and its controlled entities] will be audited by
another auditor, [Name of component Auditor] (“Component Auditor”).
3.2. The Act and [Identify] Auditing Standards require that [Name of Entity Conducting the Audit]
takes responsibility for the audit of the consolidated financial statements, which includes
information audited by the component auditor, and that [Name of Entity Conducting the Audit]
obtains sufficient appropriate audit evidence regarding the financial information of the
Component and the consolidation process to express an opinion on the consolidated financial
statements.
3.3. As the group auditor, we need to ensure that the communication between us and the Component
Auditor is unrestricted to the extent possible under law or regulation.
3.4. Any important communications between the Component Auditor, Directors and management of
[the Consolidated entity] including communications on significant deficiencies in internal
control, should be communicated to us as the group auditor
3.5. Also, important communications between regulatory authorities and [Name of component]
related to financial reporting matters should be communicated to us.
3.6. To the extent we consider necessary, you agree that as group auditor we are permitted access to
[Name of component]’s information, and Directors, Management, and others charged with
governance of [Name of component], and [the Component Auditor] including relevant audit
documentation.
3.7. We will also have authority to perform work or request the Component Auditor to perform
work on the financial information of [Name of component].
3.8. Should there be restrictions imposed on:
• Our access to [Name of component]’s information, or to Directors, management, and
others charges with governance of [Name of component], or the Component Auditors
including relevant audit documentation, or
• The work to be performed by us on the financial information of [Name of component]
after our acceptance of this engagement.
this would constitute an inability to obtain sufficient appropriate audit evidence that may affect
the group audit opinion. In exceptional circumstances it may lead to our withdrawal from the
engagement.
3.9. We note that a separate engagement letter is to be issued by the Component auditor.
4. Communication
4.1. In order to ensure that there is effective two-way communication between us we set out below
the expected form and timing of such communications.
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• We shall contact you by [telephone] prior to each year-end for preliminary discussions
concerning the audit. We will confirm in writing the matters discussed and any agreed
action.
• We will arrange a meeting to discuss the forthcoming audit prior to the expected start
date. Again we will confirm in writing the matters discussed and any agreed action.
• We will arrange a meeting to discuss any matters arising from the audit after completion
of the detailed work. Again we will confirm in writing the matters discussed and any
agreed action.
4.2. The formal communications set out above are the minimum required to comply with auditing
standards. We shall of course contact you on a more frequent and regular basis regarding both
audit and other matters.
The above paragraphs are a suggestion only. It is important that the wording is tailored to the
procedures in your practice and for the client concerned. The letter of engagement is a
contract between you and your client. You should not include procedures that will not be
performed!
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5. Detection of Fraud, Error and Non-Compliance with Laws and Regulations
5.1. Directors are responsible for safeguarding the Company’s/consolidated entity’s assets and for
the prevention and detection of fraud, error and non-compliance with regulatory requirements.
5.2. Directors also have responsibility to advise us of, or ensure that we are advised of, any known
or suspected fraud within the consolidated entity.
5.3. Our audit procedures are designed to provide reasonable assurance that there are no undetected
errors or irregularities, including fraud and other illegal acts, material to the financial
statements.
5.4. As audit testing is based on samples it may not result in errors and irregularities being detected.
5.5. Our audit can only provide reasonable, not absolute, assurance that the financial statements are
free from material misstatement.
5.6. Our review procedures are designed to provide limited assurance on these matters.
6. Management Representations
6.1. As part of our audit process, we will request from management and/or those charged with
governance written confirmation concerning representations made to us in connection with our
audit.
7. Engagement of Specialists
7.1. In the course of completing our audit, matters may arise in which we neither profess nor are
reputed to be authoritative. In the event that this occurs, we will discuss with you how we might
best resolve the particular matter.
7.2. This may necessitate the appointment by you or us of an appropriate specialist, the cost of
which is not included as part of our fee estimate.
8. Communication of Audit Matters
8.1. We will communicate audit matters of governance interest arising from our audit with:
(i) the Board of Directors,
(ii) the Audit Committee and/or
(iii) management
as we consider appropriate in relation to the matter to be communicated.
8.2. Ordinarily, we will initially discuss audit matters of governance interest with management.
8.3. Some of these matters will be communicated orally and some in writing. All matters will be
communicated on a timely basis.
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8.4. The Act and the Code and other professional standards impose obligations of confidentiality on
our personnel that restrict our communication of certain audit matters of governance interest.
8.5. Identify any whistle blower legislation that prevents us communicating allegations of fraud etc,
eg:
In particular, Section xxx of the Act provides that if a person discloses information to the
consolidated entity’s auditor or to a member of the audit team in relation to a contravention or
possible contravention of the Act by the consolidated entity, or an officer or employee of the
consolidated entity, the consolidated entity’s auditor or a member of the audit team is guilty of
an offence if the consolidated entity’s auditor or a member of the audit team discloses that
information, the identity of the discloser or information likely to lead to the identification of the
discloser to anyone other than to certain authorities, without the consent of the discloser.
8.6. An audit of financial statements is not designed to identify all matters that may be relevant to
those charged with governance. Accordingly, our audit does not ordinarily identify all such
matters.
8.7. Our communication of matters of governance interest will include only those audit matters of
governance interest that come to our attention as a result of the performance of our audit.
9. Form and Content of Audit Report and Review Report
9.1. Our audit report will be in the form required by the Act and [Identify] Auditing Standards and
may be similar to the drafts on the attached Appendix. ATTACH DRAFT.
9.2. The form and content of our audit report may need to be amended in the light of our audit
findings.
10. Fees
10.1. We look forward to full co-operation from your staff and we trust that they will make available
to us whatever records, documentation and other information we request in connection with our
audit.
10.2. Our fixed fee quote/s for the [SPECIFY AUDIT WORK] is/are as follows:
Service Professional Fee
(Excluding
Audit for the year ending XXXX VAT/GST)
Income tax compliance $
Total Professional Fees
Out-of-pocket expenses, expected to be minor, will be charged as incurred. 34 of 43
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11. Agreement of terms
11.1. You or we may agree to vary or terminate our authority to act on your behalf at any time
without penalty. Notice of variation or termination must be given in writing.
11.2. This letter will be effective for future years unless it is terminated, amended or superseded. The
terms of this letter also apply to all work carried out by us in connection with this engagement
prior to the date of signing this letter.
11.3. Please sign and return a copy of this letter to indicate that it is in accordance with your
understanding of the arrangements for our audit of the financial statements.
11.4. If you do not sign and return a copy but permit us to proceed, we are entitled to assume that this
letter is in accordance with your understanding.
Yours faithfully
[Name]
Partner
-----------------------------------------------------------------------------------------------------------------------
Acknowledged and agreed on behalf of [Name of Company]
Signed _________________________ Date ____________________________
Name __________________________ Title ____________________________
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STANDARD TERMS OF BUSINESS
The following standard terms of business apply to all engagements accepted by [Collective Name of
firm]. All work carried out is subject to these terms except where changes are expressly agreed in
writing.
1. [Collective Name of firm]
1.1 Our professional practice is conducted in [Location] under the name [Name of Entity Conducting
the Audit] and by [Name of Practice Company], a practice company approved by [identify].
[Name of Entity Conducting the Audit] and [Name of Practice Company], are members of the
[Name of Federation], a network of independent accounting firms whose members practise as
“[Collective Name of firm]” in designated territories throughout [Location]. Our designated
territory is [Location].
1.2 Through the [Name of Federation] we are members of HLB International, a worldwide network of
independent accounting firms.
1.3 Each member of the [Name of Federation] and of HLB International is a separate legal entity and
as such has no liability for the acts and omissions of any other member. [Name of Federation] co-
ordinates the [Location] activities of the [Name of Federation] network and HLB International co-
ordinates the international activities of the HLB International network, but the [Name of
Federation] and HLB International do not provide, supervise or manage professional services to
clients. We are not in partnership with the other members of the [Name of Federation] or HLB
International and we do not hold ourselves out as being a member of a national or international
partnership. Accordingly, the [Name of Federation] and HLB International have no liability for the
acts and omissions of any of their members.
1.4 You agree, as the client, that each firm you appoint has sole liability for the work covered by their
engagement. You undertake not to bring any proceedings or make any claim whatsoever against
any other member of HLBI or against HLBI itself, in relation to the work covered by each
agreement.
1.5 The word "Partner" is a title and describes firm individuals who are members of [Name of Entity
Conducting the Audit]. A list of the members is available for inspection at the offices of the firm.
2. Independence and Conflicts of Interest
2.1 We confirm that, to the best of our knowledge and belief, we currently meet the independence
requirements of [Identify] Professional and Ethical Standard Code of Ethics for Professional
Accountants (“the Code”) and the [Identify legislation] (”the Act”) in relation to the audit of the
financial statements. In conducting our audit of the financial statements, should we become aware
that we have contravened the independence requirements of the Code or the Act we will notify you
on a timely basis.
2.2 The Code and the Act include specific restrictions on the employment relationships that can exist
between the audited entity and its auditors. To assist us in meeting the independence requirements
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of the Code and the Act, and to the extent permitted by law and regulation, we request that you
discuss with us:
(i) the provision of services offered to you by [Collective Name of firm] prior to engaging or
accepting the service; and
(ii) the prospective employment opportunities of any current or former Partner or professional
employee of [Collective Name of firm] prior to the commencement of formal employment
discussions with the current or former Partner or professional employee.
2.3 If you request us to provide other services we will be pleased to provide those additional services
provided that our independence is not compromised. In relation to non-audit services you request
that we perform it will be the responsibility of your Directors and management to ensure that they:
(i) make all management decisions and perform all management functions;
(ii) designate a competent employee to oversee the services;
(iii)evaluate the adequacy and results of the services performed; and
(iv)accept responsibility for the results of the services.
2.4 We reserve the right during our engagement with you to deliver services to other clients whose
interests might compete with yours or are or may be adverse to yours. We confirm that we will
notify you immediately should we become aware of any conflict of interest involving us and
affecting you.
2.5 If a conflict of interest should arise, either between two or more of our clients, or in the provision
of multiple services to a single client, we will take such steps as are necessary to deal with the
conflict. In resolving the conflict, we would be guided by the code of ethics of [insert appropriate
cite of code of ethics].
3. Reporting
3.1 At the conclusion of our work we may issue a report in relation to matters we consider appropriate
to bring to the attention of the Directors, management and/or others charged with governance. If
any such report deals with internal controls, it may not contain all matters that a full review of
internal controls may identify, as our audit work is primarily conducted to allow us to express an
opinion or conclusion on the financial statements.
3.2 This report may not be provided to a third party without our written consent. We may, at our
discretion, grant or withhold our consent or grant it subject to conditions, including an
acknowledgement by a recipient that the report is not prepared with the interests of anyone other
than you in mind and that we accept no duty or responsibility to any other party.
3.3 Any report we issue will be addressed to the Board or Audit Committee after it has been discussed
with management.
4. Presentation of Audited and Reviewed Financial Report on the Internet
4.1 It is our understanding that the Company may publish a hard copy of the audited financial
statements and auditor’s report, and also to electronically present the audited financial statements
and auditor’s report on its internet website.
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4.2 Responsibility for the electronic presentation of financial statements on the Company’s website is
that of the Directors of the Company. The security and controls over information on the website
should be addressed by the Company to maintain the integrity of the data presented.
4.3 The examination of controls over the electronic presentation of audited financial statements on the
Company’s website is beyond the scope of the audit of the financial statements.
5. Other Documents Accompanying the Audited Financial Reports
5.1 [Identify] Auditing Standards require that we read any annual report and any other documents that
contain our audit opinion. The purpose of this procedure is to consider whether other information
in the document, including the manner of its presentation, is materially consistent with information
appearing in the audited financial statements. We assume no obligation to perform procedures to
corroborate such other information as part of our audit.
5.2 We also request that where any document containing the audited financial statements indicates that
the financial statements have been audited, our auditor’s report will also be included in the
document.
6. Quality Control
6.1 The conduct of our audit in accordance with [Identify] Auditing Standards means that information
acquired by us in the course of our audit is subject to strict confidentiality requirements.
Information will not be disclosed by us to other parties except as required or allowed for by law or
professional standards, or with your express consent.
6.2 Our audit files may, however, be subject to review as part of the quality control review program of
[identify, eg local professional body], which monitors compliance with professional standards by
its members, and the [Name of Federation] and HLB International quality assurance programs,
which monitor the quality of audits undertaken by member firms. [Identify government or other
body] also conducts reviews of audit firms, and these reviews include reviews of individual audit
files.
6.3 By signing this letter you acknowledge that, if requested, our audit files relating to the audit will be
made available under the review programs outlined above. Should this occur in relation to the
[Identify local professional body] and [Identify government or other body] reviews we will advise
you. The same strict confidentiality requirements apply under these programs as they apply to us
as your auditor.
7. Access to Working Papers
7.1 Our working papers and other internal documentation created for the purpose of carrying out our
duties as auditor belong solely to [Collective Name of firm]. Copies of any of these documents will
only be made available to you at the sole discretion of the Engagement Partner.
7.2 We may also be required to give access to our working papers in compliance with other statutory
requirements.
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8. Events Subsequent to Issue of Auditor’s Report
8.1 Once we have issued our auditor’s report we have no further direct responsibility in relation to the
financial statements for that financial period. However, by signing this letter you confirm that you
will inform us of any material event occurring between the date of our auditor’s report and the date
that the financial statements are issued which, had it been known to us at the date of the auditor’s
report, may have caused us to amend the auditor’s report.
9. Electronic Communication
9.1 We may correspond with you by post, by fax or electronically.
9.2 We are not responsible for any delay, non-delivery or interruption of any of these methods of
communication.
9.3 The electronic transmission of information cannot be guaranteed to be secure, error free or virus
free and such information could be intercepted, corrupted, lost, destroyed, arrive late or
incomplete, or otherwise adversely affected or unsafe for use. We will use commercially
reasonable procedures to check for the most common known viruses before sending information
electronically. We shall not have any liability of whatsoever nature to the Company and its
controlled entities arising from or in connection with electronic communication and transfer of
information to the Company and its controlled entities.
9.4 You authorise us to communicate with you and provide you with documents electronically. To the
extent permitted by law, we will not be responsible for any liability caused in connection with
electronic transmissions. You will take all reasonable steps to ensure that you have suitable
systems in place to prevent corruption of data, or transmission of viruses in your electronic
documents or other communication to us. You acknowledge and accept the risks that email
communications may not always be secure, irrespective of the security we have in place.
9.5 Please contact us immediately if you have any doubts about the authenticity of any documents or
communications purportedly sent by us.
9.6 We authorise you to communicate with us and provide to us documents electronically.
10. Confidentiality and Privacy
10.1 Where you give us confidential information we shall at all times keep it confidential, except as
required by law or as provided for in regulatory, ethical or other professional pronouncements
applicable to this engagement.
10.2 In carrying out our engagement we may need to access personal information in order to fulfil our
engagement responsibilities. We draw to your attention the provisions of the [Identify Privacy
legislation] in relation to personal information and note that we may need to collect and use
personal information relating to [members, employees, family members, associates, business
partners and other] individuals who deal with [the Company] and its controlled entities. We will
only record information which is necessary for the provision of services, that is, information that
the individuals concerned could reasonably expect to be available to and used by you in connection
with your dealings with them.
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10.3 You warrant to us that you have notified, or prior to the commencement of the engagement will
notify, such individuals (and any other individuals or class of persons we identify) that their
personal information may be provided to [Collective Name of firm] in relation to the engagement.
10.4 We undertake to act in accordance with the Privacy Act and the Australian Privacy Principles in
the provision of services. By signing a copy of this letter you undertake to act in accordance with
those requirements in relation to any information that you provide to us. Please refer to our website
for a copy of our Privacy Policy.
10.5 Before you disclose personal information to us, whether that information relates to you or someone
else, you should make sure that you are entitled to disclose that information.
10.6 If you become aware of any breach or alleged breach of privacy laws concerning the information
that you have disclose to us, you must notify us immediately.
10.7 You also consent to us transferring personal information to foreign countries if that transfer is
required for the purpose of providing a service to you.
10.8 [If offshore processing is likely to be used on this engagement, include details including location
of overseas recipient and how information will remain confidential. Otherwise delete].
11. Limitation of Liability
11.1 Our liability is limited by a scheme approved under [identify any relevant legislation]. Further
information on the scheme is available from the [identify website].
12. Health and Safety
12.1 We are required to comply with the provisions of the [Identify any Occupational Health and Safety
Legislation] (the “OHS Act”) by taking practical steps to ensure the health and safety of our
people. [Name of firm] expects mutual responsibility for people to ensure their own safety and that
no harm is caused to others in the workplace, but the OHS Act places responsibility for their safety
on your Company and its controlled entities when they are visitors to your [site/s].
13. Fees
13.1 Our fees are computed on the basis of time spent on your affairs by the Partners and our staff and
on the levels of skill and responsibility involved.
13.2 These fees are exclusive of GST, and have been offered to [the Company] on the following
conditions:
• Matters requiring audit attention are not significantly different from those encountered last year [or when
the fee was set];
• Work that is to be completed by your staff is completed and made available to us in accordance with an
agreed timetable;
• No errors requiring significant additional work will be encountered;
• No major rework or revision is required to the draft financial statements;
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• Accounting records and other financial information that we wish to examine are properly kept and in a
form that makes them readily accessible to our staff; and
• We will not have to stop work and/or make follow up visits because of delays caused by your staff or the
unavailability of information required for the audit and review.
13.3 If the conditions outlined above have not been met we will inform you and advise if additional
audit hours are required. If we are required to provide additional audit hours, or you request us to
provide accounting assistance to enable you to meet your reporting obligations on time, additional
charges will apply.
13.4 Unless an additional fixed fee is agreed, additional charges will be calculated on the basis of hours
occupied charged at our standard rates ruling at the relevant time for the applicable personnel.
13.5 If it is necessary to carry out work outside the responsibilities outlined in this letter, we will advise
you in advance. Any additional work will involve additional fees. Accordingly, it is in your
interests to ensure that your records etc. are completed to the agreed stage.
13.6 We will endeavour not to commence work that attracts additional charges before notifying you that
additional charges will apply, however in some circumstances we may be required to use our
discretion and provide additional audit hours or provide accounting assistance to enable the
Company to meet its objectives. You agree that in such cases our reasonable additional fees will
be payable.
13.7 In addition to our fees, we may incur expenses (disbursements) on your behalf during the
engagement. General disbursements may include charges and expenses for travel, accommodation,
and document production and handling, including photocopying, fax charges and couriers. By
engaging us you consent to us incurring these disbursements on your behalf and you agree to
reimburse us for them (VAT/GST will be charged as appropriate)
13.8 We will seek your approval before incurring any unusual or extraordinary expenses on your behalf.
13.9 We will arrange to invoice at periodic intervals during the course of the year and would remind
you that all invoices rendered are due for settlement within 30 days. Invoices are payable in full
(including disbursements) in accordance with the terms set out on the invoice
13.10Any query over a fee rendered must be raised in writing to us within 30 days of the date of the fee
note. If no query is so raised within this period the fee will be due and payable without any right of
further explanation, amendment or dispute.
13.11Furthermore we reserve the right to charge interest and to apply collection charges for late
payment. We also reserve the right to terminate our engagement and cease acting if payment of
any fees billed is unduly delayed.
13.12 If you do not pay our invoice in full, we may:
(i) Elect not to continue to provide our services to you
(ii) Suspend work until further payment is made
(iii) Charge interest on any unpaid amount. The rate of interest will be at the prevailing bank
rate, and
(iv) Instigate legal proceedings without further notice.
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13.13Where an invoice becomes overdue for payment and legal action is taken to enforce payment we
reserve the right to pursue for all monies owed.
14. Retention of and access to records
14.1 During the course of our work we will collect information from you and others acting on your
behalf and will return any original documents to you following the preparation and audit, if
appropriate, of your financial statements. You should retain these records for at least seven years
from the end of the accounting year to which they relate.
14.2 Whilst certain documents may legally belong to you, we intend to destroy correspondence and
other papers that we store which are more than seven years old, other than documents which we
consider to be of continuing significance. If you require retention of any document you must notify
us of that fact in writing.
15. Help us to give you the right service
15.1 If at any time you would like to discuss with us how our service to you could be improved, or if
you are dissatisfied with the service you are receiving, please let us know by contacting your
Engagement Partner or the firm’s [insert appropriate person and title].
15.2 We undertake to look into any complaint carefully and promptly and to do all we can to explain
the position to you. If you feel that we have given you a less than satisfactory service, we
undertake to do everything reasonable to address your concerns. If you are still not satisfied, you
may of course take up matters with [name authoritative governing body].
15.3 In order for us to provide you with a high quality service on an ongoing basis it is essential that
you provide to us relevant records and information when requested, reply to correspondence in a
timely manner and otherwise follow the terms of the agreement between us set out in this Standard
Terms of Business and associated Engagement letter. We reserve the right to cancel the
engagement between us with immediate effect in the event of:
• your insolvency, bankruptcy or other arrangement being reached with creditors;
• failure to pay our fees by the due dates;
• either party being in breach of their obligations where this is not corrected within 30 days of
being asked to do so.
15.4 In addition this agreement may be terminated by either side for any reason if 90 days’ notice is
given.
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16. Use of our name in statements or documents issued by you
16.1 You are not permitted to use our name in any statement or document that you may issue unless our
prior written consent has been obtained. The only exception to this restriction would be statements
or documents that in accordance with applicable law are to be made public.
17. Draft/interim work or oral advice
17.1 In the course of our providing services to you we may provide advice or reports or other work
products in draft or interim form, or orally. However, final written work products will always
prevail over any draft, interim or oral statements. Where you request it, we will provide you with
written confirmation of matters stated orally.
18. Recruitment of engagement personnel
18.1 Because of our need to remain independent during the course of our engagements, professional
standards require our Partners and employees to notify our firm if offered employment by, or
seeking employment with, any client while participating on our engagements. Because of our
increased costs to hire replacement employees and related staff training, you agree to remit to us
100 percent of gross first year compensation for any [Collective Name of firm] Partner or
employee participating in this engagement whom you may hire or retain in any capacity within one
year from the completion of this engagement. This payment is to be remitted to us within 30 days
of the date of hire or retention.
19. Applicable law
19.1 This engagement letter is governed by, and construed in accordance with [name local law].
19.2 If any provision in this Standard Terms of Business or any associated engagement letter, or its
application, are found to be invalid, illegal or otherwise unenforceable in any respect, the validity,
legality or enforceability of any other provisions shall not in any way be affected or impaired.
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6. PLANNING (INCORPORATING ISA 300)
6.1. Objective
6.1.0.1 The objective of the auditor is to plan the audit so that it will be performed in an
effective manner.
6.1.1. Role and timing of Planning
6.1.1.1 Planning involves establishing and documenting the overall audit strategy for the
engagement and developing and documenting an audit plan, in order to perform audit
procedures to reduce audit risk to an acceptably low level. Adequate planning benefits the
audit of financial statements in several ways, including the following:
Helping the auditor to devote appropriate attention to important areas of the audit.
Helping the auditor identify and resolve potential problems on a timely basis.
Helping the auditor properly organise and manage the audit engagement so that it is
performed in an effective and efficient manner.
Assisting in the selection of engagement team members with appropriate levels of
capabilities and competence to respond to anticipated risks, and the proper assignment
of work to them.
Facilitating the direction and supervision of engagement team members and the review
of their work.
Assisting where applicable, in coordination of work done by auditors of components and
experts.
6.1.1.2 Planning is not a discrete phase of an audit, but rather a continual and iterative process
that often begins shortly after (or in connection with) the completion of the previous audit and
continues until the completion of the current audit engagement. Planning should in any case
start before the accounting year-end to take into account year-end procedures which need to
be carried out e.g. attendance at the annual inventory count or circularisation of receivables.
The nature and extent of planning will vary according to the size and complexity of the entity,
the key engagement team members’ previous experience with the entity and changes in
circumstances that occur during the audit engagement.
6.2. Involvement of key engagement team members
6.2.1 The engagement partner and other key members of the engagement team shall be
involved in planning the audit, including planning and participating in the discussion among
engagement team members. The involvement of the engagement partner and other key
members of the engagement team in planning the audit draw on their experience and insight
thereby enhancing the effectiveness and efficiency of the planning process.
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6.3. Preliminary engagement activities
6.3.1 Continuing audits
6.3.1.1 Prior to performing any significant activities for the current audit engagement, the
engagement partner should perform preliminary engagement activities to help ensure that he
has considered any events or circumstances that may adversely affect his ability to plan and
perform the audit engagement to reduce audit risk to an acceptably low level. Independence
may also be impaired if overdue fees, together with fees from the proposed re-appointment will
constitute a significant loan. The process often commences shortly after the completion of the
previous audit. The key components include:
Performing procedures required by ISA 220 regarding the continuation of the client
relationship and the specific audit engagement.
Evaluating compliance with the relevant ethical requirements, including independence,
in accordance with ISA 220.
Understanding the terms of the audit engagement as required by ISA 210.
Consideration should be given to whether the firm has the necessary resource and
experience to continue the audit engagement.
Considering significant matters that may have arisen during the previous engagement
and thereafter that may adversely affect continuation of the engagement. Such matters
could include significant lapses in internal controls, frauds, doubts over the integrity of
management etc.
Form 410 in Part I of the Manual - Engagement Continuation Questionnaire should be
completed each year as Form 410 in the Current Audit File.
6.3.2. Additional considerations in initial engagements
6.3.2.1 The engagement team should perform the following activities prior to starting an initial
audit engagement:
Performing procedures required by ISA 220 regarding the acceptance of the client
relationship and the specific audit engagement; and
Communicating with the predecessor auditor, where there has been a change of
auditors, in compliance with relevant ethical requirements.
Form 405 in Part I of the Manual - Client Acceptance Questionnaire should be completed for
each new acceptance.
6.4. Planning activities
6.4.1. Key planning activities
6.4.1.1 The table below summarises the key planning activities and gives reference to the
chapter in the Manual where these stages are covered in detail.
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Planning Activity ISA Audit Manual
Reference
Preliminary Engagement activities
Independence ISA 220 and Chapter 4.14 to
COE 4.16
Client acceptance (initial engagement) and continuation ISA 220 Chapters 4.17,
5.2 and 5.4
Terms of audit engagement ISA 210 Chapter 5.3
Planning - Overall audit strategy
Materiality ISA 320 Chapters 11.3
and 11.4
Assessing the reporting requirements ISA 800, ISA Chapter 9.2.5 to
805, ISA 810 9.2.9 and 10
& IAPS 1014
Communicating audit matters to those charged with ISA 260/ISA Chapters 27.3,
governance 265 27.4, 28.4 and
28.5
Preliminary assessment of the accounting system and ISA 315 and Chapters 7.4,
internal controls ISA 402 7.5, 12.3 and
12.4
Setting out responsibilities for the engagement team ISA 200 Chapter 2.5
Development of the audit strategy ISA 300 Chapter 6.4.2.
Opening balances and comparatives ISA 510 / Chapter 14
ISA 710
Planning - Audit plan
Preliminary analytical review ISA 520 Chapter 16.4
Preliminary review of risk ISA 315 Chapter 7.3
Considering the work of internal audit and other sources ISA 505, ISA Chapters 13.2,
of reliance 580,ISA 600, 22.2 and 29
ISA 610 and
ISA 620
Setting materiality levels ISA 320 Chapters 11.3
and 11.4
Response to assessed risk ISA 330 Chapter 7.13
Consideration of fraud ISA 240 Chapter 8.5
Related Parties ISA 550 Chapters 19.3
and 19.4
Compliance / Substantive testing ISA 315 Chapters 7.2.9,
7.8, 7.17, 7.19
Sampling ISA 530 Chapters 17.7
and 17.8
Quality control ISA 220 Chapters 4.1,
4.2, 4.3 and 4.4
Administration including audit timetable, audit ISA 220 and Chapter 6 and
requirements, time and staff budgets and allocation of ISA 300. Part I
work.
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6.4.2 Overall audit strategy
Key points
6.4.2.1 The development and documentation of the overall audit strategy sets the scope,
timing and direction of the audit, and guides the development of the more detailed audit plan.
It also helps to ascertain the nature, timing and extent of the resources necessary to perform
the engagement. In developing the audit strategy, the engagement team may consider the
experience gained on other engagements performed for the entity. The key points of an audit
strategy include:
Identify the characteristics of the engagement that define its scope.
Ascertain the reporting objectives of the engagement to plan the timing of the audit and
the nature of the communications required.
Consider the factors that, in the auditor’s professional judgment, are significant in
directing the engagement team’s efforts.
Consider the results of preliminary engagement activities and, where applicable,
whether knowledge gained on other engagements performed by the engagement
partner for the entity is relevant.
Ascertain the nature, timing and extent of resources necessary to perform the
engagement.
The resources to deploy for specific audit areas, such as the use of appropriately
experienced team members for high risk areas or the involvement of experts on
complex matters;
The amount of resources to allocate to specific audit areas, such as the number of team
members assigned to observe the inventory count at material locations, the extent of
review of other auditors’ work in the case of group audits, or the audit budget in hours to
allocate to high risk areas;
When these resources are to be deployed, such as whether at an interim audit stage or
at key cut-off dates; and
How such resources are managed, directed and supervised, such as when team
briefing and debriefing meetings are expected to be held, how engagement partner and
manager reviews are expected to take place (for example, on-site or off-site), and
whether to complete engagement quality control reviews.
Review and updating the client background information.
Location of the components of the entity.
Financial reporting framework used and industry specific reporting requirements.
Materiality.
Identification of areas where there may be higher risk of material misstatement.
Preliminary identification of material components and account balances.
Preliminary indication of whether the auditor may plan to obtain evidence regarding the
effectiveness of internal controls.
Identification of recent significant entity-specific, industry, financial reporting or other
developments.
Form 402 – Overall audit strategy and plan in part I of the manual sets out a template that may
be used in recording the overall audit strategy. The template is a guide and should be tailored
to the specific circumstances of each engagement.
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Discussion with client
6.4.2.2 Discussions with the client will be an essential aid to developing the audit strategy. The
discussions would usually take place before the accounting year-end. It would be preferable to
have a pre-audit meeting but in some cases a telephone conversation may be adequate. One of
the primary aims of such discussions is to enable the auditor to update his knowledge of the
client’s business. An auditor should have sufficient knowledge of the business to enable him to
identify and understand the events and activities that may have a significant effect on the
financial statements. Discussions should also aim to:
Obtain the latest financial information to help in setting materiality levels and in performing
preliminary analytical review work.
Agree a timetable (including inventory counts and visits) and any specific deadlines.
Agree schedule requirements and on any other accounting work to be produced by the
client.
Find out the actions taken on the points raised in last year's management letter.
Agree settlement of any outstanding fees.
Identify any specific areas of concern to the client and their impact on the audit scope.
It may be appropriate to document the above in writing.
Review of last year's file
6.4.2.3 The last year's audit file should be reviewed for:
Points brought forward to be considered during the engagement.
Any areas where time or cost savings could be made, any unnecessary audit work and
any other ways in which the effectiveness of the audit could be improved.
Any previously unidentified areas of audit risk.
Initial engagements
6.4.2.4 In case of initial engagements, while the planning elements remain the same as for
recurring engagements, the auditor may need to expand the planning activities as the auditor
does not necessarily have the previous experience with the entity that is considered when
planning recurring engagements. Additional matters that may be considered in planning initial
engagements include:
Where possible and where not prohibited by law, consider arrangements with the
previous auditor to review the working papers.
Review any major issues, including the application of accounting principles or auditing
and reporting standards discussed with management or those charged with governance
in connection with the initial selection as auditors, and how these affect the audit
strategy and audit plan.
Obtaining sufficient appropriate audit evidence regarding opening balances.
Involvement of another partner or a senior individual to review the overall audit strategy
prior to commencing significant audit procedures or to review reports prior to their
issuance.
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Audit of small entities
6.4.2.5 In audits of small entities, the entire audit may be conducted by a very small audit
team. Many audits of small entities involve the engagement partner (who may be a sole
practitioner) working with one engagement team member (or without any engagement team
members). With a smaller team, co-ordination of, and communication between, team members
are easier. Establishing the overall audit strategy for the audit of a small entity need not be a
complex or time-consuming exercise; it varies according to the size of the entity, the
complexity of the audit, and the size of the engagement team. For example, a brief
memorandum prepared at the completion of the previous audit, based on a review of the
working papers and highlighting issues identified in the audit just completed, updated in the
current period based on discussions with the owner manager, can serve as the documented
audit strategy for the current audit engagement if it covers the matters noted in ISA 300.8.
Documentation
6.4.2.6 The documentation of the overall audit strategy is a record of the key decisions
considered necessary to properly plan the audit and to communicate significant matters to the
engagement team. For example, the auditor may summarize the overall audit strategy in the
form of a memorandum that contains key decisions regarding the overall scope, timing and
conduct of the audit.
Appendix I: Matters that an auditor may consider in developing an audit strategy provides
examples of the matters that an auditor may consider in establishing an audit strategy.
6.4.3 Audit plan
6.4.3.1 Once the overall audit strategy has been established, the auditor can commence the
development of a more detailed audit plan to address the various matters identified in the
overall audit strategy. Although the auditor establishes the overall audit strategy before
developing the audit plan, the two activities are not necessarily discrete or sequential
processes but closely inter-related since changes in one may result in consequential changes
to the other.
The audit plan shall include a description of:
The nature, timing and extent of planned risk assessment procedures, as determined
under ISA 315.
The nature, timing and extent of planned further audit procedures at the assertion level
as determined under ISA 330.
Other planned audit procedures that are required to be carried out so that the
engagement complies with the ISAs.
6.4.3.2 The documentation of the audit plan is a record of the planned nature, timing and
extent of risk assessment procedures and further audit procedures at the assertion level in
response to the assessed risks. It also serves as a record of the proper planning of the audit
procedures that can be reviewed and approved prior to their performance. The auditor may
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use standard audit programs or audit completion checklists, tailored as needed to reflect the
particular engagement circumstances.
Appendix II: Contents of the audit plan provides a summary of the contents of an audit plan.
Form 402 - Audit strategy and plan in Part I of the Manual sets out a template that may be
used in recording the audit plan. The template is a guide and should be tailored to the specific
circumstances of each engagement.
6.4.3.3 The audit programme documents the nature, timing and extent of audit procedures to
be performed at the assertion level for each material class of transactions, account balance
and disclosure. The programme sets out the nature, timing and extent of the audit procedures
required to implement the overall plan and serves as a set of instructions to the engagement
team and as a means to control and record the proper execution of the audit.
6.4.3.4 In preparing the audit programme, consideration should be given to the specific
assessment of risk and the level of assurance to be provided by test of internal controls and
substantive procedures.
6.4.3.5 Part I of the manual provides specimen audit programmes. These must however be
edited and added to where necessary to ensure the implementation of the overall audit plan.
The use of unedited programmes does not constitute adequate planning as it could expose the
auditor to risks not covered in detail by the programme or result in the auditor carrying out
unnecessary tests thereby resulting in inefficiencies.
6.4.3.6 The audit plan and audit programme will often be prepared by experienced members of
the engagement team. In the case of high risk audits, the engagement partner may also be
involved in preparing the plan, particularly in the areas of materiality, risk assessment and
approach to assessed risk and sample sizes. The plan together with the tailored audit
programmes setting out the nature, timing and extent of the audit procedures to be adopted
during the engagement should be completed and approved by the partner prior to
commencement of the engagement. In the case of sole proprietorships or small audit firms, the
partner may be actively involved in developing the audit plan and programmes.
6.4.4 Communication with those charged with governance
6.4.4.1 The engagement partner may discuss elements of planning with those charged with
governance and the management as part of the overall communication required to be made or
to improve the effectiveness and efficiency of the audit. The overall audit strategy and audit
plan, however, remain the auditor’s responsibility and the engagement team should exercise
care not to compromise the audit by making the audit procedures too predictable by discussing
the nature, timing and the extent of the audit tests. The matters normally communicated would
include the overall audit strategy, the timing of the audit, any limitations on the scope of the
audit and the audit requirements.
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6.5. Changes to planning decisions during the course of the audit
6.5.1 The engagement team shall update and change the overall audit strategy and the audit
plan as necessary during the course of the audit.
6.5.2 The engagement team may be required to change the audit strategy and audit plan
thereby resulting in the planned nature, timing and extent of further audit procedures as a
result of:
Unexpected events;
Changes in conditions e.g. a material business combination; or
Evidence obtained from the result of audit procedures which contradict the information
available at the planning stage or the result of substantive tests which contradict the
results obtained from testing the effectiveness of internal controls.
6.5.3 A record of the significant changes to the overall audit strategy and the audit plan, and
resulting changes to the planned nature, timing and extent of audit procedures, explains why
the significant changes were made, and the overall strategy and audit plan finally adopted for
the audit. It also reflects the appropriate response to the significant changes occurring during
the audit.
6.6. Considerations specific to smaller entities
6.6.1 If an audit is carried out entirely by the engagement partner, questions of direction and
supervision of engagement team members and review of their work do not arise. In such
cases, the engagement partner, having personally conducted all aspects of the work, will be
aware of all material issues. Forming an objective view on the appropriateness of the
judgments made in the course of the audit can present practical problems when the same
individual also performs the entire audit. If particularly complex or unusual issues are involved,
and the audit is performed by a sole practitioner, it may be desirable to consult with other
suitably-experienced auditors or the auditor’s professional body.
6.6.2 A suitable, brief memorandum may serve as the documented strategy for the audit of a
smaller entity. For the audit plan, standard audit programs or checklists drawn up on the
assumption of few relevant control activities, as is likely to be the case in a smaller entity, may
be used provided that they are tailored to the circumstances of the engagement, including the
auditor’s risk assessments.
6.7. Direction and supervision of engagement team members and review of their work
6.7.1 The auditor shall plan the nature, timing and extent of direction and supervision of
engagement team members and the review of their work. The nature, timing and extent of the
direction and supervision of the engagement team members and the review of their work will
vary depending on many factors, including:
The size and complexity of the entity.
The area of the audit.
The assessed risks of material misstatement.
The capabilities and competence of the individual team members performing the work.
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6.7.2 If particularly complex or unusual issues are involved, and the audit is performed by a
sole practitioner, it may be desirable to consult with other suitably-experienced auditors or the
auditor’s professional body.
6.8. Time budgeting
6.8.1 The auditor’s service to a client is based on the level of staffing involved on the
engagement and the time spent by each staff on the engagement. It is therefore important that
the firm adequately costs its time to ensure that it is running a commercially viable practice and
keeps an adequate record of time spent on each engagement.
6.8.2 Time budgets are an essential tool for monitoring the progress of an engagement, in
determining actual performance against the budget and to assist in future planning of audits.
6.8.3 The aim of preparing budgets is:
To aid in planning, so that the engagement team may use their time efficiently.
To monitor the actual costs of the engagement.
To estimate and negotiate the fees.
6.8.4 When preparing budgets, the following factors should be considered:
The level of detail i.e. whether the budget is to be broken down into individual audit
areas or prepared for the assignment as a whole.
The time to be spent in planning, review and completion procedures.
Any additions in the scope of the engagement.
Contingency factors such as future staff salary increases.
A comparison of last year's time spent with this year's budget. Any significant
differences should be explained.
6.8.5 When conducting the audit, the engagement team should aim to keep within the budget
in so far as is possible, but should never compromise the standard of their audit work, to keep
within budget. If it appears that there will be significant discrepancies between the budgeted
time and the actual time, the engagement team should inform the engagement partner as soon
as possible, particularly where additional time arises due to the client's shortcomings.
6.8.6 Time summaries should be prepared for all engagements and the total time spent should
be compared with the budgeted time and reasons given for significant variances. A record
should be kept of work which the engagement team have had to complete as a result of client
shortcomings, as a basis for additional charges if necessary.
Form 450 Part I - Time budget format gives the format of preparing the time budgets and the
actual on an overall basis
6.9. Documentation
6.9.1 The auditor shall include in the audit documentation:
The overall audit strategy;
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The audit plan; and
Any significant changes made during the audit engagement to the overall audit strategy or
the audit plan, and the reasons for such changes.
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APPENDIX I: Considerations in establishing the overall audit strategy
A. Scope of the audit engagement
A summary of the terms of the engagement.
Industry specific reporting and legal requirements and how the entity is complying with these.
Any specific legal responsibilities of the auditor.
The financial reporting framework to be used in preparing the financial statements and need
for reconciliation to another reporting framework.
B. Entity specific issues
Changes in the client background information.
The nature of the business including number and location of components to be audited,
contact person at each component, and working hours.
Any special circumstances.
The need for specialised knowledge including involvement of specialist staff and non-audit
experts.
The reporting currency to be used including any translation requirements.
Internal audit and the extent of reliance that can be placed on work of the internal audit
function or work of other experts or specialists.
The group structure, including the nature of control between the parent and its components,
the need for standalone financial statements, the consolidation requirements and the extent
to which components are audited by other auditors.
The expected use of audit evidence obtained in prior years, e.g. audit evidence related to risk
assessment procedures and tests of controls.
The effect of information technology on the audit processes, including the availability of data
and the expected use of computer-assisted auditing techniques.
The coordination of the expected coverage and timing of the audit work with any reviews of
interim financial information and the effect on the audit of the information obtained during
such reviews.
Discussion of matters that may affect the audit with firm personnel responsible for performing
other services to the entity.
Availability of client personnel and data.
C. Business and regulatory environment
Details of any significant changes in industry conditions affecting the entity’s business (for
major clients, consideration should be given to discussing industry conditions with
economists or industry regulators or obtaining industry publications).
Changes and trends in the business including new activities, products or locations; changes
in governance and senior management; general level of competence of management; legal
disputes; and financial performance and trends.
Changes in the client's accounting systems; issues emanating from review of reports from
the internal audit function; and changes in accounting standards, policies or regulatory
pronouncements and their effect on the entity.
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D. Reporting objectives, timing of the audit and communications required
The entity’s timetable for reporting including interim and final audits.
The nature and timing of reports or other communications that are expected under the
engagement including the auditor’s report, management letters and communications to those
charged with governance.
The outcome of meetings with management and those charged with governance regarding
the expected communication on the status of the audit work throughout the engagement and
the expected deliverables from the audit process taking into account the nature, extent and
timing of the audit work.
Communication with auditors of components regarding the expected types and timing of
reports to be issued and other communication in connection with the audit of components.
The expected nature and timing of communication among the engagement team members,
including the nature and timing of team meetings and timing of the review of the work
performed.
Statutory or contractual reporting responsibilities arising from the audit and any other
expected communication with third parties.
E. Other issues to consider when setting the direction of the audit
Materiality:
• Setting materiality for planning purposes.
• Setting and communicating materiality for auditors of the components.
• Reconsidering materiality as audit procedures are performed during the course of the
audit.
• Identifying material components and account balances.
Identification of audit areas where there is a higher risk of material misstatement and
discussions among the engagement team on these.
The impact of assessed risk of material misstatement at the overall financial statement level
on the direction, supervision and review.
Time budget including the allocation of the appropriate amount of time for areas where there
may be higher risk of material misstatement and the selection of an engagement team,
(including, where appropriate, an engagement quality control reviewer) and the assignment
of tasks to members of the engagement team with suitable and appropriate experience.
Volume of transactions, which may determine whether it is more efficient for the auditor to
rely on internal controls.
Assessment of the control environment and evidence of management’s commitment to
design, document and ensure the operation of sound internal controls and the importance
attached to internal controls throughout the entity to successful operations of the business.
Results of previous audits that involved evaluating the operating effectiveness of internal
controls, including identified weaknesses and actions taken to address them.
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APPENDIX II: CONTENTS OF THE AUDIT PLAN
A. Preliminary analytical review - chapter 16.4 of the manual
Review of key business ratios, trends and other financial information available at this stage
as a risk assessment procedure to obtain an understanding of the entity and its environment.
B. Preliminary risk assessment - chapter 7.3 of the manual
A preliminary review of overall risk and key risks in individual audit areas and their impact on the
audit taking into account:
Past experience.
Areas large in materiality.
Changes in financial reporting standards and accounting policies.
Areas where there is a significant risk of material misstatement or fraud.
Complex accounting areas including those involving accounting estimates.
The impact of information technology.
Conditions requiring special attention, such as the existence of related party transactions,
contingencies, market and industry conditions.
Any taxation aspects which may affect the audit.
Appropriateness of the going concern assumption.
C. Sources of reliance
Refer to Chapter 13 of the Manual on Audit Evidence.
D. Materiality - chapter 11.3 and 11.4 of the manual
Details of the materiality level chosen and the reason for choosing it.
E. Auditor’s response to assessed risk - chapter 7.7 of the manual
This will include the risks identified for each key audit area above and the planned response to
such risks including the use of specialised audit tools such as Computer Assisted Audit
Techniques (CAAT’s).
F. Sampling techniques - chapter 17 of the manual
The sampling techniques to be adopted.
G. Audit timetable and requirements
Determination and communication of the accounting work and audit schedules that will be
prepared by the client and by the auditor.
Consideration of independence requirements where accounting and tax work is carried by
the auditor.
Overall audit timetable including:
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• Client and legal reporting deadlines.
• Availability of accounting records for audit commencement.
• Year-end procedures.
• Audit needs at different client locations.
Time and cost budgets.
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7. IDENTIFYING AND ASSESSING THE RISKS OF MATERIAL MISSTATEMENT
THROUGH UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT AND THE
AUDITOR’S RESPONSES TO ASSESSED RISKS (INCORPORATING ISA 315 AND
330)
7.1. Objective
7.1.1 The objective of the auditor is to identify and assess the risks of material misstatement,
whether due to fraud or error, at the financial statement level and assertion levels, through
understanding the entity and its environment, including the entity’s internal control, thereby
providing a basis for designing and implementing responses to the assessed risks of material
misstatement.
7.1.2 Having assessed the risks, the objective of the auditor is then to obtain sufficient
appropriate audit evidence regarding the assessed risks of material misstatement, through
designing and implementing appropriate responses to those risks.
7.2. Definitions
Assertions – Representations by management, explicit or otherwise, that are embodied in
the financial statements, as used by the auditor to consider the different types of potential
misstatements that may occur.
Business risk – a risk resulting from significant conditions, events circumstances, actions
or inactions that could adversely affect an entity’s ability to achieve its objectives and
execute its strategies, or from the setting of inappropriate objectives and strategies.
Internal control – the process designed, implemented and maintained by those charged
with governance, management and other personnel to provide reasonable assurance about
the achievement of an entity’s objectives with regard to reliability of financial reporting,
effectiveness and efficiency of operations, and compliance with laws and regulations.
Risk assessment procedures – the audit procedures performed to obtain an
understanding of the entity and its environment, including the entity’s internal control, to
identify and assess the risks of material misstatement, whether due to fraud or error, at the
financial statement level and assertion levels.
Significant risk – An identified and assessed risk of material misstatement that, in the
auditor’s judgement, requires special audit consideration.
Substantive Procedure – an audit procedure designed to detect material misstatements at
the assertion level. Substantive procedures comprise (1) tests of details and (2) substantive
analytical procedures.
Test of Controls – an audit procedure designed to evaluate the operating effectiveness of
controls in preventing, or detecting and correcting, material misstatements at the assertion
level.
7.2.1. Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the
financial statements are materially misstated. This definition does not include the risk that the
auditor may erroneously express an opinion that the financial statements are materially
misstated. The auditor reduces audit risk by designing and performing audit procedures to
obtain sufficient appropriate audit evidence to draw reasonable conclusion on which to base
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the audit opinion. Reasonable assurance is obtained when the audit risk is reduced to an
acceptably low level.
7.2.2 Audit risk is a function of the risk of material misstatement of the financial statements i.e.
the risk that financial statements are materially misstated prior to the audit (made up of
inherent risk and control risk) and the risk that the auditor will not detect such misstatements
(detection risk).
7.2.3 Inherent risk is the susceptibility of an assertion (representations by management,
explicit or otherwise, that are embodied in the financial statements) to a material misstatement
assuming that there are no related controls.
7.2.4 The assessment of inherent risk is a judgemental process.
Appendix I: Inherent risk considerations provides a list of factors that the engagement team
may consider when assessing inherent risk.
7.2.5 Control risk is the risk that a material misstatement that could occur in an assertion will
not be prevented or detected and corrected on a timely basis by the entity’s accounting and
internal control systems.
Control risk can only be assessed as low if the controls have been tested.
7.2.6 Detection risk is the risk that the auditor’s procedures will not detect a material
misstatement that exists in an assertion. A component of detection risk is Analytical Risk which
is the risk that analytical procedures, used as substantive procedures, will fail to detect a
material misstatement. Analytical risk is covered in detail in Chapter 16.7 of the Manual.
7.2.7 Whether the risk assessment is quantified or not, the auditor has to assess how the
estimation of the levels of risk affects the testing to be carried out:
A low inherent risk assessment will mean that less assurance needs to be gained from
detailed audit tests than a high risk assessment.
Low control risk will mean more emphasis can be placed on tests of controls, and
substantive tests of detail would be of less importance.
Low analytical risk will mean more emphasis can be put on analytical review as
substantive procedures, and detailed substantive tests of detail would be of less
importance.
The higher the inherent risk, the higher the level of assurance that is required for the test of
control and from substantive procedures (including analytical procedures used as
substantive procedures) and therefore the higher the sample size required.
7.2.8 The inverse relationship between inherent risk on the one hand and control and detection
risks (including analytical risk as a component of detection risk) on the other, in order to
achieve an acceptably low level of audit risk, is shown below.
7. Identifying and assessing the risks of material misstatement through understanding the entity and its
environment and the auditor’s responses to assessed risk
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Good Internal Control Weak Internal Control Higher Risk with Weak
Internal Control
Control Inherent Detection
Risk Risk Risk
Inherent Detection Inherent Detection
Risk Risk Risk Risk
Audit Audit Audit
Risk Risk Risk
7.2.9 In the conduct of an audit in accordance with ISAs and to obtain sufficient and reliable
audit evidence to enable the auditor to draw reasonable conclusions on which to base the
audit opinion, the auditor undertakes the following steps:
Risk assessment procedures: These are used to obtain an understanding of the entity and
its environment, including its internal control, to assess the risks of material misstatement
at the financial statement and assertion levels. This includes the use of analytical
procedures as risk assessment procedures at the planning stage. At the end of this stage,
the engagement team assesses the audit risk and develops audit procedures in response
to the risk including the nature, extent and timing of the audit tests. These procedures are
covered in detail in this chapter.
Tests of controls: Based on the above and on the auditor’s assessment of internal control,
the team may, together with substantive procedures, test the operating effectiveness of
controls in preventing or detecting and correcting material misstatements at the assertion
level. These procedures are covered in detail in this chapter.
Substantive procedures: The auditor then plans the level of assurance that the team
requires from substantive testing including the use of substantive analytical procedures.
Substantive procedures are used to detect material misstatements at the assertion level
and include tests of details of classes of transactions, account balances and disclosures.
The extensive use of substantive procedures is commonly known as the substantive
approach, while the approach to use the tests of controls as well as substantive
procedures is known as the combined approach. Substantive procedures are covered in
this chapter of the manual, while analytical procedures are covered in Chapter 16 of the
manual.
Audit evidence, completion and reporting: The auditor obtains sufficient appropriate audit
evidence to be able to draw reasonable conclusions on which to base the audit opinion.
7. Identifying and assessing the risks of material misstatement through understanding the entity and its
environment and the auditor’s responses to assessed risk
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This includes the use of analytical review to ensure that the financial statements, taken as
a whole, are consistent with the auditor’s understanding of the entity. Audit evidence,
analytical review, completion and the audit report are covered in Chapters 13, 16, 24 and
25 of the Manual respectively.
7.3. Risk assessment procedures and related activities at the planning stage
7.3.1 The auditor shall perform risk assessment procedures to provide a basis for the
identification and assessment of risks of material misstatement at the financial statement and
assertion levels. Risk assessment procedures by themselves, do not provide sufficient
appropriate audit evidence on which to base the audit opinion.
7.3.2 Obtaining an understanding of the entity and its environment, including the entity’s
internal control, is a continuous, dynamic process of gathering, updating and analysing
information throughout the audit. The understanding establishes a frame of reference within
which the auditor plans the audit, for example, when:
Assessing risks of material misstatement of the financial statements;
Determining materiality in accordance with ISA 320;
Considering the appropriateness of the selection and application of accounting policies
and the adequacy of financial statement disclosures;
Identifying areas where special audit consideration may be necessary, for example, related
party transactions, the appropriateness of management’s use of the going concern
assumption, or considering the business purposes of transactions;
Developing expectations for use when performing analytical procedures;
Responding to assessed risks of material misstatement, including designing and
performing further audit procedures to obtain sufficient appropriate audit evidence; and
Evaluating the sufficiency and appropriateness of audit evidence obtained, such as the
appropriateness of assumptions and of management’s oral and written representations.
7.3.3 The auditor is also required to assess the risks of material misstatement due to fraud.
This is covered in Chapter 8 of the Manual. The auditor at the planning stage should
summarise the key risks attached to the entity and factors that may minimise or eliminate
those risks.
7.3.4 The auditor usually obtains an understanding of the entity and its environment, including
its internal control through:
Information obtained while performing the client acceptance and continuation procedures.
Inquiries of management and others within the entity, who in the auditor’s judgement may
have information that is likely to assist in identifying risks of material misstatement due to
fraud or error, including employees, internal audit and those charged with governance;
Analytical procedures;
Observation of the entity’s activities and operations including visits to premises and plant
facilities;
Inspection of documents such as business plans and strategies, internal control manuals,
management and board minutes, management reports and interim financial statements;
Tracing transactions through the information systems relevant to financial reporting; and
7. Identifying and assessing the risks of material misstatement through understanding the entity and its
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External sources e.g. bank or rating agency reports, legal counsel, valuation experts, trade
journals and regulatory and financial publications.
Information obtained from performing other engagements for the entity.
7.3.5 The table below summarises the type of information that could be obtained from inquiry:
Level of Inquiry Type of Information That Could Be Obtained
Governance Understanding of the environment in which the financial
Management (usually statements are prepared.
the main source of Assessment of the control environment.
information) The entity’s performance including an overall understanding of
Internal audit the entity and its internal control.
Design and effectiveness of internal control.
Employees Whether management has responded satisfactorily to findings
from the internal audit function.
Legal counsel (both in- From those involved in initiating, processing or recording complex
house and external) or unusual transactions: Evaluation of the appropriateness of the
selection and application of certain accounting policies.
Marketing or sales personnel: Changes in marketing strategies,
sales trends and contractual arrangements with customers.
Litigation.
Compliance with laws and regulations.
Knowledge of fraud or suspected fraud.
Warranties and post-sales obligations.
Arrangements with business partners including special
arrangements, joint ventures, shareholders’ agreements and any
special commitments to buy or sell.
Analytical procedures
7.3.6 Analytical procedures performed as risk assessment procedures may identify aspects of
the entity of which the auditor was unaware and may assist in assessing the risks of material
misstatement in order to provide a basis for designing and implementing responses to the
assessed risks. Analytical procedures performed as risk assessment procedures may include
both financial and non-financial information, for example, the relationship between sales and
square footage of selling space or volume of goods sold.
7.3.7 Analytical procedures may help identify the existence of unusual transactions or events,
and amounts, ratios, and trends that might indicate matters that have audit implications.
Unusual or unexpected relationships that are identified may assist the auditor in identifying
risks of material misstatement, especially risks of material misstatement due to fraud.
7.3.8 However, when such analytical procedures use data aggregated at a high level, the
results of those analytical procedures only provide a broad initial indication about whether a
material misstatement may exist. Accordingly, in such cases, consideration of other
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information that has been gathered when identifying the risks of material misstatement
together with the results of such analytical procedures may assist the auditor in understanding
and evaluating the results of the analytical procedures.
Considerations specific to smaller entities
7.3.9 Some smaller entities may not have interim or monthly financial information that can be
used for purposes of analytical procedures. In these circumstances, although the auditor may
be able to perform limited analytical procedures for purposes of planning the audit or obtain
some information through inquiry, the auditor may need to plan to perform analytical
procedures to identify and assess the risks of material misstatement when an early draft of the
entity’s financial statements is available.
Information obtained in prior periods
7.3.10 Where the auditor intends to use information obtained about the entity and the
environment in prior periods, the team should determine whether changes have occurred that
may affect the relevance of such information in the current audit e.g. changes in the entity or
its environment may render such information irrelevant. They should also make inquiry or
perform other audit procedures such as walk through tests to determine whether changes have
occurred that may affect the relevance of such information.
Discussions amongst the engagement team
7.3.11 The engagement partner and key engagement team members shall discuss the
susceptibility of the entity’s financial statements to material misstatement and the application of
the applicable financial reporting framework to the entity’s facts and circumstances to gain a
better understanding of the potential for material misstatements of the financial statements
arising from fraud or error in the specific areas assigned to them, and to understand how the
results of the audit procedures they perform may affect other aspects of the audit including the
decisions about the nature, timing and extent of further audit procedures.
7.3.12 The discussion among the engagement team about the susceptibility of the entity’s
financial statements to material misstatement:
Provides an opportunity for more experienced engagement team members, including the
engagement partner, to share their insights based on their knowledge of the entity.
Allows the engagement team members to exchange information about the business risks to
which the entity is subject and how and where the financial statements might be
susceptible to material misstatement due to fraud or error.
Assists the engagement team to gain a better understanding of the potential for material
misstatement of the financial statements in the specific areas assigned to them, and also to
understand how the results of the audit procedures that they perform affect other aspects of
the audit including the decisions about the nature, timing and extent of further audit
procedures.
Provides a basis upon which engagement team members communicate and share new
information throughout the audit that may affect the assessment of risks of material
misstatement or the audit procedures performed to address these risks.
7.3.13 Ordinarily, only the key members of the engagement team are involved in the
discussion. In certain cases, it may be necessary to involve experts including professionals
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