Obtaining an Engagement BSA 210: Agreeing the Terms of Audit Engagement

1. OBTAINING AN ENGAGEMENT

2. Amin Siddiki FCA
BSA 210: Agreeing the Terms of Audit Engagement
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3. Amin Siddiki FCA
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Appointment Considerations
• Before a new client is accepted, the auditors must ensure that
there are no independence or other ethical issues likely to
cause significant problems with the ethical code.
• New auditors should ensure that they have been appointed
in a proper and legal manner

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Before accepting engagement auditor must carry out following procedures
• Consider whether disqualified on legal or ethical grounds,
for example, if there would be a conflict of interest with
another client
Ensure professionally qualified to act
• Consider available time, staff and technical expertise
Ensure existing resources adequate
• Make independent enquiries if directors are not personally
known.
Obtain references
• Enquire whether there are reasons/circumstances behind the
change which the new auditors ought to know, also as a
matter of courtesy
Communicate with present auditors

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Some of the basic factors for consideration are given below:
• The integrity of Management will be of great importance,
particularly if the company is controlled by one or a few
dominant personalities.
• The audit firm will consider whether the client is likely to be
high or low risk to the firm in terms of being able to draw
an appropriate assurance conclusion in relation to the
client.

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Low Risk High Risk
Good long-term prospects Poor recent or forecast
Well-financed Likely lack of finance
Strong internal controls Significant control weaknesses
Conservative, prudent
accounting policies
Evidence of questionable
integrity, doubtful accounting
policies
Competent, honest
management
Lack of finance director
Few unusual transactions Significant unexplained
transactions or transactions with
connected companies.
Table contrasts low and high risk clients:
Low Risk High Risk
Good long-term prospects Poor recent or forecast
Well-financed Likely lack of finance
Strong internal controls Significant control weaknesses
Conservative, prudent
accounting policies
Evidence of questionable
integrity, doubtful accounting
policies
Competent, honest
management
Lack of finance director
Few unusual transactions Significant unexplained
transactions or transactions with
connected companies.

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Sources of information about new clients
Enquires of other
sources
Bankers, solicitor
Review of
documents
Most recent annual accounts, credit
rating
Previous
accounts/auditors
Previous auditors should be invited to
disclose fully all relevant information
Review of rules
and standards
Consider specific laws/standards that
relate to industry

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Communication with previous/retiring auditors
Prospective auditors should seek the prospective client’s
permission to contact the previous auditors.
If this permission is not given
The prospective auditors should consider carefully the reason
for such refusal when determining whether or not to accept the
appointment.
Normally permission will be given, so the prospective auditors can
write to the outgoing auditors.

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Example: Initial Communication with previous/retiring auditor
xx-xx- xxxx
ABC & Co
Chartered Accountants
Dear Sir
Ref: XYZ Ltd.
Professional Clearance
We have pleasure in informing you that we have been appointed
as auditors of “XYZ Ltd.” for the year xx December 20xx. Since you
were the previous auditors of the company, we would like to know
from you if there is any professional reason as to why we should
not accept the appointment.
XYZ & Co
Chartered Accountants

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Approach by
Potential Client
yesno First Audit
Accept/Reject
Appointment
Does Client give
permission to
contact old auditor?
noyes
Consider carefully,
reason for this
refusal
Write for Professional
Clearance
noyes
Does Client give
permission to old
auditor to reply
Did old Auditor Reply?
no
yes
Give old auditor
due notice then
decide

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Procedures, after accepting nomination

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I. Ensure that the outgoing auditor’s removal or resignation has
been properly conducted in accordance with national
legislation.
•The new auditor should see a valid notice of the outgoing
auditor’s resignation, or confirm that the outgoing auditors
were properly removed.
II. Ensure that the new auditor’s appointment is valid. The new
auditor’s should obtain a copy of the resolution passed at the
general meeting appointing them as the company’s auditors.
III.Submit a letter of engagement to the directors of the company
Procedures, after accepting nomination

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Other Assurance Engagements
i. The above considerations will be required for any
assurance engagements.
ii. The legal considerations relating to audit will not be
relevant to other assurance engagements but the ethical,
risk, and practical considerations will be just as valid

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Engagement Letter

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Auditing standards require that the auditor and the client should
agree on the terms of the engagement. The agreed terms must
be in writing and the usual form would be a letter of
engagement.

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Purpose of an Engagement Letter
The purpose of an engagement letter is to:
1. Define clearly the extent of the firm’s responsibilities
and so minimize the possibility of any
misunderstanding between the client and the firm.
2. Provide written confirmation of the firm’s acceptance
of the appointment, the scope of the engagement and the
form of their report.

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Form & Content of an Audit Engagement Letter
The form and content audit engagement letters may vary for each
client, but they would generally include reference to the following:
1. The objective of the audit of financial statements.
2. Management’s responsibility for the financial statements.
3. The scope of the audit, including reference to applicable legislation,
regulations or pronouncements of ICAB to whom the auditor
adheres.
4. The form of any reports or other communication of results of the
engagement.

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5. The fact that because of the test nature and other inherent
limitations of an audit, together with the inherent limitations of
any accounting and internal control systems, there is an
unavoidable risk that even some material misstatements may
remain undiscovered.
6. Unrestricted access to whatever records, documentation and
other information is requested in connection with the audit.
7. The agreement of management to make available to the auditor
draft financial statements and any accompanying other
information in time to allow the auditor to complete the audit in
accordance with the proposed timetable.
Form & Content of an Audit Engagement Letter

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Form & Content of an Audit Engagement Letter
The auditor may wish to include in the letter the following items:
a. Arrangements regarding the planning and performance of the
audit, including the composition of the audit team.
b. Expectation of receiving from management written
confirmation of representations made in connection with the
audit.
c. A request for management to acknowledge receipt of the audit
engagement letter and to agree to the terms of the engagement
outlined therein.
d. The agreement of management to inform the auditor of facts
that may affect the financial statements, of which management
may become aware during the period from the date of the
auditor’s report to the date the financial statements are issued.

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e. Description of any other letters or reports the auditors expects to
issue to the client.
f. The confidentiality of any reports issued and if relevant, the
terms under which they can be shared with third parties.
g. The basis on which fees are computed and any billing
arrangements.
Form & Content of an Audit Engagement Letter

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When relevant, the following points could also be made in the audit
engagement letter:
I. Arrangements concerning the involvement of other auditors and
experts in some aspects of the audit.
II. Arrangements concerning the involvement of internal auditors and
other staff of the entity.
III. Arrangements to be made with the predecessor auditor, if any, in the
case of an initial audit.
IV. Any restriction of the auditor’s liability when such possibility exists.
V. A reference to any further agreements between the auditor and the
client.
VI. Any obligations to provide audit working papers to other parties.
Form & Content of an Audit Engagement Letter

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An example of an audit engagement letter is set out in the
Appendix 1 of BSA 210.

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Audit Engagement Letter for Recurring Audits
The auditor should consider whether circumstances require
the terms of the engagement to be revised and whether
there is a need to remind the client of the existing terms of
the engagement.
The auditor may decide not to send a new audit engagement
letter or other written agreement each period.

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However, the following factors may make it appropriate to send a new letter
to revise the terms of the audit engagement or to remind the entity of
existing terms:
a. Any indication that the entity misunderstands the objective and scope
of the audit.
b. Any revised or special terms of the audit engagement.
c. A recent change of senior management.
d. A significant change in ownership.
e. A significant change in nature or size of the entity’s business.
f. A change in legal or regulatory requirements.
g. A change in the financial reporting framework adopted in the
preparation of financial statements.
h. A change in other reporting requirements

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