Auditing and Ethics · Ethics and Terms of Audit Engagements

Engagement Acceptance, Continuance and Communication with Previous Auditor

Updated 4 October 2026 · Fact-checked

Before accepting an audit, you assess the client's integrity, your own competence, independence and resources. If you are replacing another chartered accountant or a certified auditor, you must first communicate with him in writing, and check whether he was removed or resigned and that the Companies Act, 2013 conditions were met. You then document your decision.

Understand Engagement Acceptance, Continuance and Communication with Previous Auditor

An audit firm cannot take every client. Before accepting a new engagement, or continuing an existing one, the auditor must be satisfied that the firm can do the work properly and ethically. This protects the public, the profession and the firm itself.

Acceptance and continuance considerations cover three broad areas. First, the integrity of the client: its owners, key management and those charged with governance, and the nature of its business. Second, the firm's competence, capabilities and resources: time, staff with the right skills, and access to experts if needed. Third, compliance with ethical requirements: independence, no conflict of interest, and no threat to the fundamental principles that cannot be reduced to an acceptable level. SQM 1 (Quality Management for Firms) and SA 220 (Revised) expect the firm to have policies on this. Continuance is not automatic. You review it each year, because facts change.

When another auditor is already in place, there is an extra step. Item (8) of Part I of the First Schedule to the Chartered Accountants Act, 1949 makes it professional misconduct for a chartered accountant in practice to accept a position as auditor previously held by another chartered accountant, or by a certified auditor who holds a certificate under the Restricted Certificate Rules, 1932, without first communicating with him in writing. The Schedule is part of the Act itself, and the Code of Ethics is consistent with it. The purpose is to find out whether there are any professional reasons, such as unpaid fees, disagreements on accounting treatment or unethical conduct, why you should not accept.

Under the Chartered Accountants Act, the previous auditor has no veto over your acceptance. But the company's removal or replacement of its auditor must still meet the Companies Act, 2013 conditions, and you must check them before you accept.

The Companies Act, 2013 adds legal conditions for a company. Keep three situations apart. First, removal: under section 140(1), an auditor can be removed before the end of his term only by a special resolution passed after the previous approval of the Central Government, and the auditor must be given a reasonable opportunity of being heard. Second, resignation: under section 140(2), an auditor who resigns must file a statement in Form ADT-3 with the company and the Registrar, giving his reasons. Third, replacement at an AGM: under section 140(4), special notice is needed for a resolution at an annual general meeting to appoint a person other than the retiring auditor in his place, or to provide expressly that the retiring auditor shall not be re-appointed, and the retiring auditor has a right to make representations in that case.

If the earlier auditor left before his term ended, you cannot assume which route was used. Establish first whether he was removed or resigned, then check the relevant compliance. Also check that the appointment is valid under section 139 and that you are eligible under section 141.

The previous auditor should reply, and you should consider his reply. If he does not respond, you may follow up. If there is still no reply, you may proceed only after satisfying yourself, by other means, that his removal or resignation complied with the Companies Act, and after documenting your efforts. If he gives adverse reasons, you judge them yourself. If there is no reason not to accept and the Companies Act conditions are met, you may accept. Keep all of this in the working papers.

Key rules to remember

Acceptance considerations: Integrity of client + Competence and resources + Ethical compliance (including independence); All three must be satisfied before accepting or continuing. Failing any one means decline or withdraw.
Rule on previous auditor: Incoming auditor must communicate in writing with the previous auditor before accepting the appointment; Item (8) of Part I of the First Schedule to the Chartered Accountants Act, 1949: applies to a chartered accountant in practice accepting a position as auditor previously held by another chartered accountant or a certified auditor holding a certificate under the Restricted Certificate Rules, 1932. Not doing so is professional misconduct. The previous auditor has no veto under this Act, but the company's removal or replacement must still meet the Companies Act conditions.
Order of steps for a replacement auditor: Check eligibility → Communicate with previous auditor → Check validity of removal or resignation → Accept → Document; Memory sequence. Use it to structure written answers.
Companies Act provisions to cite: Section 139 (appointment), section 140 (removal, resignation, special notice), section 141 (eligibility); Cite them in your answer for companies. Removal before the term ends: section 140(1). Resignation, with Form ADT-3 filed by the auditor: section 140(2). Special notice for a resolution at an AGM to appoint a person other than the retiring auditor, or to provide expressly that the retiring auditor shall not be re-appointed, with the retiring auditor's right to make representations: section 140(4). Otherwise state the rule in words.
Engagement documentation: Acceptance decision and reasons are recorded in the audit file; Examiners credit a mention of documentation.

How to solve Engagement Acceptance, Continuance and Communication with Previous Auditor questions

Use this approach for any question on accepting an engagement or replacing an auditor. It works for MCQs and for 5 to 7 mark written answers.

1Identify the situation: new client, continuing client, or replacement of an existing auditor.
2State the principle first, in one line, such as the need for written communication with the previous auditor.
3Test the facts against acceptance factors: client integrity, competence and resources, independence and ethical compliance.
4If a company is involved, check the Companies Act points: valid appointment, eligibility, and whether the earlier auditor was removed (section 140(1)) or resigned (section 140(2)) and the relevant steps were followed.
5Apply the rule to the facts and show what the auditor should do: write to the previous auditor, wait for or follow up on a reply, evaluate it.
6Reach a clear conclusion: accept, accept after resolving the point, or decline.
7Add that the decision and the communication are documented.

Quickest way: Rule, facts, verdict in three lines

When to use it: Use this when you have little time, or for a 1 or 2 mark MCQ on whether an auditor can accept an appointment.

For MCQs, look for the word 'written' and the word 'before'. Options that say oral communication, or communication after acceptance, are usually wrong.
Eliminate options that say the auditor needs the client's permission to refuse to communicate, or that the previous auditor's reply is a veto. Under the Chartered Accountants Act the previous auditor has no veto over your acceptance, but the company's removal or replacement must still meet the Companies Act conditions.
For written answers, use three labelled parts: Provision, Facts, Conclusion. Give each a few lines.
Under Provision, name the First Schedule requirement under the Chartered Accountants Act, 1949 and the relevant section of the Companies Act, 2013 if the entity is a company.
Under Conclusion, say plainly whether the auditor may accept, and add the documentation point to pick up the last mark.

Common mistakes in Engagement Acceptance, Continuance and Communication with Previous Auditor

Saying communication with the previous auditor can be oral or after accepting.
Students remember that communication is needed but not the timing and form.
Fix: Remember: in writing and before acceptance. Failing this is professional misconduct under the First Schedule.
Treating the previous auditor's reply as a veto.
Students assume the earlier auditor must agree to the change.
Fix: The reply informs your decision. You judge any adverse reasons yourself. His consent is not required under the Chartered Accountants Act. The company's removal or replacement must still meet the Companies Act conditions.
Writing only about the Chartered Accountants Act and the Code of Ethics and ignoring the Companies Act in a company question.
The topic title mentions only communication with the previous auditor.
Fix: For a company, also check the validity of appointment, the removal or resignation conditions in section 140, and eligibility under section 141.
Treating acceptance as only a one-time event at the start.
Students overlook the word 'continuance'.
Fix: State that continuance is reviewed each period, and that new information about integrity or independence can lead to withdrawal.
Listing only client integrity as the acceptance factor.
Integrity is the most memorable factor.
Fix: Always give all three: integrity, competence and resources, and ethical compliance including independence.
Forgetting to document the decision.
Documentation feels like an afterthought.
Fix: End every answer with a line that the acceptance considerations, communication and conclusion are recorded in the working papers.

Worked examples

Example 1

CA Meera, a chartered accountant in practice, is approached to audit PQR Ltd in place of the existing auditor, CA Rohan, whose term has not ended. The management says there is no need to contact CA Rohan, as it has decided to change auditors. Advise CA Meera.

Show the solution

Provision: Under Item (8) of Part I of the First Schedule to the Chartered Accountants Act, 1949, a chartered accountant in practice who accepts a position as auditor previously held by another chartered accountant (or a certified auditor holding a certificate under the Restricted Certificate Rules, 1932) must first communicate with him in writing. Not doing so is professional misconduct.
Facts: The management's wish to change auditors does not remove this duty. The duty is on the incoming auditor. CA Rohan is a chartered accountant, so the rule applies. CA Rohan has no veto over her acceptance under this Act.
Companies Act check: CA Rohan's term has not ended, and the facts only say that the management has decided to change auditors. This could be a removal or a resignation, so CA Meera should first establish which it was. If he was removed, section 140(1) requires a special resolution passed after the previous approval of the Central Government, and he must be given a reasonable opportunity of being heard. If he resigned, section 140(2) requires him to file a statement in Form ADT-3 with the company and the Registrar giving his reasons. She should check the relevant compliance. Special notice under section 140(4) is a different matter: it applies to a resolution at an AGM to appoint a person other than the retiring auditor, or to provide expressly that the retiring auditor shall not be re-appointed.
Action: She should write to CA Rohan, ask whether there is any professional reason not to accept, and consider his reply. If he gives reasons, she evaluates them herself.
Documentation: She records the communication, what she found on removal or resignation, and her decision in the audit file.

Answer: CA Meera must write to CA Rohan before accepting. She must also establish whether he was removed (section 140(1)) or resigned (section 140(2), Form ADT-3) and verify that the relevant compliance was done. She should not accept simply on the management's assurance. Accepting without communication would be professional misconduct.

Example 2

An audit firm is considering whether to continue as auditor of a long-standing client. During the year the firm learns that the client's promoter has been dishonest with lenders, and the firm has also lost the senior staff who knew the client's industry. Discuss the firm's position.

Show the solution

Principle: Acceptance and continuance require satisfaction on client integrity, firm competence and resources, and ethical compliance. Continuance is reviewed regularly.
Integrity: Information that the promoter was dishonest with lenders raises serious doubts about the integrity of management and those charged with governance. The firm must evaluate it.
Competence and resources: Loss of staff with industry knowledge may leave the firm without the skills or time needed. The firm must see whether it can replace them or use experts.
Conclusion: If the integrity concerns cannot be resolved, or the firm cannot get the required competence, it should consider withdrawing, following the legal and ethical steps that apply to resignation, including section 140 for a company.
Documentation: The firm records its evaluation and decision.

Answer: The firm must not continue automatically. The integrity concern is serious and the resource gap is real. Unless both are resolved, it should withdraw by following the proper process, and it must document its reasoning.

Exam tips

In replacement questions, mention three things: written communication, before acceptance, and checking the Companies Act conditions. These carry the marks.
Use the provision-facts-conclusion format. Examiners look for the conclusion stated clearly.
Do not quote sub-section numbers unless you are sure. Name section 140 and describe the rule in words. Safe ones: 140(1) for removal before the term ends, 140(2) for resignation with Form ADT-3, and 140(4) for special notice of an AGM resolution to appoint a person other than the retiring auditor or to provide expressly that the retiring auditor shall not be re-appointed.
If the facts only say the client 'changed' its auditor, say you must first establish whether the earlier auditor was removed or resigned.
For MCQs, eliminate options that make oral communication enough or give the previous auditor a veto over your acceptance.
Link this topic to engagement letters. After acceptance, the terms are agreed in writing.

Practice questions from Ethics and Terms of Audit Engagements

Engagement Acceptance, Continuance and Communication with Previous Auditor in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

ACCA Strategic ProfessionalEngagement Acceptance and Continuance

Engagement Acceptance, Continuance and Communication with Previous Auditor: frequently asked questions

Is communication with the previous auditor mandatory?

Yes, for a chartered accountant in practice who accepts a position as auditor previously held by another chartered accountant or by a certified auditor holding a certificate under the Restricted Certificate Rules, 1932. Item (8) of Part I of the First Schedule to the Chartered Accountants Act, 1949 requires written communication before acceptance. Failure is professional misconduct. The previous auditor has no veto over your acceptance under this Act, but the company's removal or replacement must still meet the Companies Act conditions.

What if the previous auditor does not reply?

You should follow up and try to get his response. If he still does not reply, you may proceed only after satisfying yourself, by other means, that his removal or resignation complied with the Companies Act, and after documenting your efforts. Silence alone does not clear the Companies Act check, so you cannot skip it.

What does section 140 of the Companies Act, 2013 deal with?

It deals with the removal and resignation of auditors. Under section 140(1), removal before the term ends needs a special resolution after previous Central Government approval, with a reasonable opportunity of being heard for the auditor. Under section 140(2), an auditor who resigns files a statement in Form ADT-3. Section 140(4) is separate: it requires special notice for a resolution at an AGM to appoint a person other than the retiring auditor, or to provide expressly that the retiring auditor shall not be re-appointed. Establish whether the earlier auditor was removed or resigned, and check the relevant conditions before accepting.

What is the difference between acceptance and continuance?

Acceptance is the decision on a new client. Continuance is the review of an existing client each period. Both test integrity, competence and resources, and ethical compliance.