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SA 210 (Revised): Agreeing to the Terms of Audit Engagement

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Mar 22, 2024

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SA 210 (Revised): Agreeing to the Terms of Audit Engagement

SA 210 addresses the important considerations that an independent auditor must keep in mind when agreeing to the terms of an audit engagement with management or 'Those charged with Governance'.

Introduction and Scope

The Revised Standard on Auditing (SA 210) focuses on the auditor's responsibilities in agreeing to the terms of the audit engagement with management. SA 210 establishes the preconditions for an audit, terms of an audit engagement, changes to the engagement, and the separation of responsibilities between management and auditors.

Objective

The objective of the auditor is to accept or continue an audit engagement only when there is an agreed basis for the audit, achieved through:

1. Ensuring that the preconditions for an audit are met.

2. Confirming a common understanding between the auditor and management.

Definitions

Preconditions for an audit

The use of an acceptable financial reporting framework by management in the preparation of financial statements, and the agreement of management, and where applicable, those charged with governance, to the basis on which the audit is conducted.

Management

For the purposes of this SA, references to "management" should be interpreted as "management and, where applicable, those charged with governance" from this point forward.

Audit - Preconditions

If the preconditions for an audit are not met and the auditor does not agree after discussing with management, the auditor should not accept the proposed audit engagement, unless required to do so by law or regulation.

Limitation on Scope

The auditor should not accept an audit engagement if management imposes any scope limitations that would result in the auditor disclaiming an opinion on the financial statements, unless required by law or regulation.

Agreement on Audit Engagement Terms

The following requirements must be met for audit engagement terms:

- The terms of the audit engagement must be agreed upon with management.

- The agreed terms should be documented in an audit engagement letter or any other written form, including:

- Objective and scope of the audit.

- Auditor's responsibilities.

- Management's responsibilities.

- Identification of the applicable financial reporting framework.

- Reference to the expected form and content of reports that the auditor may issue, including any exceptions.

- If a specific law or regulation prescribes the terms of a particular audit engagement, the auditor can refer to such law in the written agreement and obtain management's acknowledgment of its responsibilities, instead of elaborating on the terms of that law.

- If the law or regulation includes management responsibilities similar to those required by SA 210, the auditor can use the wording of the law or regulation in the written agreement. For other responsibilities not prescribed by law or regulation, the auditor should use the responsibilities stated in SA 210.

Recurring Audits

For recurring audits, the auditor should assess if there is a need to revise the audit engagement terms, and when necessary, remind the entity of the existing terms.

Acceptance of Changes in Audit Engagements

Requirements for changing audit engagement terms:

- If there are any changes to ongoing audit engagements, such as a significant change in ownership or nature of the entity's business, the auditor must adhere to the following requirements.

Additional Consideration in Engagement Acceptance

A. In the event of conflicts between financial reporting standards and the supplementing law or regulation, the auditor should discuss with management and agree on:

- Whether additional requirements can be met through additional disclosures in the financial statements.

- Whether the description of the applicable financial reporting framework in the financial statements can be amended accordingly.

B. If neither of the above actions is possible, the auditor should determine whether it is necessary to modify the auditor's opinion in accordance with SA 705. Additionally, if the auditor deems the financial reporting framework prescribed by the law or regulation unacceptable, they can only accept the audit engagement if:

- Management provides additional disclosures in the financial statements to avoid any misleading information.

- The terms of the audit engagement acknowledge that the auditor's report will contain an Emphasis of Matter paragraph, highlighting the additional disclosures, as per SA 706.

- Unless required by law or regulation, the auditor's opinion on the financial statements will not include phrases such as "present fairly, in all material respects" or "give a true and fair view".

C. If the preconditions for the financial reporting framework are not met and the auditor is required by law or regulation to proceed with the engagement, the auditor should:

- Evaluate the impact of the misleading nature of the financial statements on the auditor's report.

- Include appropriate reference to this matter in the terms of the audit engagement.

D. If applicable law or regulation dictates the layout or wording of the auditor's report in a form significantly different from SA requirements, the auditor should evaluate whether:

- Users might misunderstand the assurance obtained from the audit.

- Additional explanation in the auditor's report can rectify possible misunderstanding.

- If the auditor believes that additional explanation cannot mitigate the misunderstanding, they cannot accept the engagement unless required by law or regulation.

Effective Date: SA 210 is applicable to audits of financial statements for the period beginning on or after April 1, 2010.