Auditing and Ethics · Ethics and Terms of Audit Engagements

Preconditions for an Audit and Agreeing Audit Terms (SA 210)

Updated 5 October 2026

SA 210 says an auditor must not accept an audit engagement unless preconditions exist: an acceptable financial reporting framework, and management's agreement that it acknowledges and understands its responsibilities. Once satisfied, the auditor agrees the terms in writing, usually an engagement letter, with management or those charged with governance.

Understand Preconditions for an Audit and Agreeing Audit Terms

Before you start auditing, you must check that the engagement is auditable. SA 210, Agreeing the Terms of Audit Engagements, sets this out. The idea is simple: if the base is weak, the audit cannot give a useful opinion and the auditor is exposed to risk.

The standard gives preconditions for an audit. First, the auditor determines whether the financial reporting framework used to prepare the financial statements is acceptable. Second, the auditor obtains the agreement of management that it acknowledges and understands its responsibilities. These are the two pillars. If either is missing, the auditor discusses the matter with management and, unless required by law or regulation to do so, should not accept the engagement.

There is a specific route where law prescribes the audit but the framework is unacceptable. The auditor should accept such an engagement only if the SA 210 conditions are met. First, management agrees to provide additional disclosures in the financial statements to avoid them being misleading. Second, the terms of engagement acknowledge that the auditor's report will include an Emphasis of Matter paragraph drawing users' attention to those additional disclosures. Third, the auditor's report must not state that the audit was conducted in accordance with SAs.

These three conditions are written for the unacceptable-framework case. Do not apply them to a different situation, such as missing management acknowledgement. If management does not acknowledge and understand its responsibilities, the auditor should not accept the engagement, unless required by law or regulation to do so. Where law requires the audit even though the precondition is absent, the auditor must consider the implications for the audit and the report, including the effect on the opinion, in line with the applicable SAs. Answer only what the question gives you and do not invent extra conditions.

Management's responsibilities have three parts. One, preparing the financial statements in accordance with the applicable framework, including their fair presentation where relevant. Two, maintaining the internal control that management determines is necessary to enable preparation of financial statements free from material misstatement, whether due to fraud or error. Three, giving the auditor access to all relevant information, additional information the auditor may request, and unrestricted access to persons within the entity from whom the auditor needs evidence.

To judge whether a framework is acceptable, the auditor considers factors such as the nature of the entity, the purpose of the financial statements, the nature of the financial statements (general purpose or special purpose), and whether law or regulation prescribes the framework. A framework prescribed by law for general purpose statements is presumed acceptable. For companies in India, this means the framework under the Companies Act, 2013 and the applicable Accounting Standards.

After the preconditions are met, the auditor agrees the terms of the engagement with management or those charged with governance, as appropriate. The agreed terms are recorded in an audit engagement letter or other suitable written form. This avoids misunderstanding about the objective and scope of the audit, the auditor's and management's responsibilities, and the expected form of reports.

Key rules to remember

Preconditions under SA 210: Acceptable financial reporting framework + Management's acknowledgement and understanding of its responsibilities; Both must exist before accepting. If either is absent, the auditor should not accept the engagement unless required by law or regulation to do so.
Management's responsibilities (three parts): (1) Prepare financial statements under the framework; (2) Maintain necessary internal control; (3) Provide access to information and people; Learn these as Prepare, Control, Access. They are repeated in the engagement letter.
Factors for acceptability of framework: Nature of entity + Purpose of statements + Nature of statements + Whether law prescribes the framework; Used to judge if the framework is acceptable. Framework prescribed by law for general purpose statements is presumed acceptable.
Who agrees the terms: Auditor agrees terms with management or those charged with governance, as appropriate; Terms are recorded in writing, normally an engagement letter.
Where law prescribes the audit but the framework is unacceptable: Auditor should accept only if SA 210 conditions are met: (a) management agrees to additional disclosures to avoid misleading financial statements; (b) the engagement terms acknowledge that the report will include an Emphasis of Matter paragraph drawing attention to those disclosures; (c) the report does not state that the audit was conducted in accordance with SAs; These conditions are for the unacceptable-framework case only. The auditor's report will not state that the audit was conducted in accordance with SAs. For missing management acknowledgement, the rule is different: the auditor should not accept, unless required by law or regulation to do so. If law requires the audit, the auditor considers the implications for the audit and the report, including the effect on the opinion, in line with the applicable SAs. State it as a short point unless asked for detail.

How to solve Preconditions for an Audit and Agreeing Audit Terms questions

Use this method for any theory or case question on SA 210. It works for "state the preconditions", "is the auditor right to accept" and "what should the auditor do" questions.

1Identify what is asked: preconditions, management responsibilities, or agreeing terms.
2Name the standard: SA 210, Agreeing the Terms of Audit Engagements.
3State the two preconditions: acceptable financial reporting framework and management's acknowledgement of responsibilities.
4In a case, test each fact against these two preconditions. Check whether the framework is acceptable and whether management accepts its responsibilities.
5Apply the rule: if a precondition is missing, the auditor should not accept the engagement unless required by law to do so. If the question says law prescribes the audit and the framework is unacceptable, give the three conditions.
6If preconditions are met, state that terms are agreed in writing with management or those charged with governance, usually in an engagement letter.
7Give a clear conclusion on what the auditor should do, in one line.

Quickest way: Two pillars, then three responsibilities

When to use it: Use for MCQs and for short written answers where you have limited time.

For MCQs, look for the two pillars: framework and management's responsibilities. An option that says the auditor's responsibilities are the precondition is wrong.
Remember that management prepares the statements, maintains internal control and gives access. An option that makes the auditor responsible for preparing the statements is wrong.
In writing, use this layout: provision, facts, conclusion. Start with the SA 210 rule, link the given facts, then state the decision.
Write each point on a separate line with a short heading so the examiner can award step marks.
Close with the action: accept, decline, or communicate with those charged with governance.

Common mistakes in Preconditions for an Audit and Agreeing Audit Terms

Saying the engagement letter is itself the precondition.
Students link SA 210 mainly with the engagement letter.
Fix: The preconditions are the acceptable framework and management's acknowledgement of responsibilities. The letter records the agreed terms after these are met.
Listing the auditor's duties as management's responsibilities, or the reverse.
Both sets of duties appear in the same engagement letter.
Fix: Management prepares the statements, maintains internal control and gives access. The auditor expresses an opinion on the statements.
Forgetting to say that internal control is only what management determines necessary.
Students write "management maintains internal control" without the qualification.
Fix: Write that management maintains the internal control it determines is necessary for statements free from material misstatement, whether due to fraud or error.
Writing that terms are always agreed with the management only.
Students overlook those charged with governance.
Fix: Write "management or those charged with governance, as appropriate".
Giving a conclusion without checking the facts in a case study.
Students recite the standard and skip the facts step.
Fix: Quote the given facts, match them to each precondition, then conclude. That is provision, facts, conclusion.

Worked examples

Example 1

Explain the preconditions for an audit under SA 210. Which responsibilities of management must it acknowledge and understand?

Show the solution

Name the standard: SA 210 requires the auditor to establish whether the preconditions for an audit are present before accepting the engagement.
Precondition 1: determine whether the financial reporting framework used to prepare the financial statements is acceptable.
Precondition 2: obtain management's agreement that it acknowledges and understands its responsibilities.
List management's responsibilities: prepare the financial statements under the applicable framework, including fair presentation where relevant.
Maintain the internal control management determines necessary for statements free from material misstatement, due to fraud or error.
Provide the auditor access to all relevant information, additional information requested and unrestricted access to persons within the entity.
Conclude: if the preconditions are absent, the auditor should not accept the engagement.

Answer: The two preconditions are an acceptable financial reporting framework and management's acknowledgement and understanding of its responsibilities for preparing the statements, maintaining necessary internal control and giving access to information and people. If they are absent, the auditor should not accept the engagement.

Example 2

M/s Rao & Co. is invited to audit Zenith Ltd. Zenith's management says it will prepare the financial statements but refuses to give written acknowledgement of its responsibility for internal control or to give the auditor access to certain records. Advise the auditor.

Show the solution

Provision: under SA 210, the auditor must obtain management's agreement that it acknowledges and understands its responsibilities, including internal control and access to information.
Facts: management refuses to acknowledge responsibility for internal control and restricts access to records.
Test: the second precondition is not met, because management does not accept the responsibilities that the audit is premised on.
Consequence: the auditor should not accept the engagement, unless required by law or regulation to do so. Nothing in the facts says the audit is required by law. Accepting would expose the auditor to risk and limit the evidence available.
Note: if the audit were law-mandated, the auditor would have to consider the implications for the audit and the report, including the effect on the opinion, in line with the applicable SAs.
Discussion: the auditor first discusses the matter with management. This is what SA 210 requires when a precondition is absent. If management does not resolve it, the auditor should not accept the engagement. Informing those charged with governance may be good practice, but SA 210 does not require it in this case.
Note: the three-condition route (additional disclosures, Emphasis of Matter, no statement that the audit was conducted in accordance with SAs) is for a law-mandated audit with an unacceptable framework. It does not fit these facts.
Conclusion: Rao & Co. should decline the engagement unless management acknowledges its responsibilities in writing.

Answer: Rao & Co. should not accept the engagement. Management's refusal to acknowledge its responsibilities for internal control and access means a precondition under SA 210 is absent, and the facts do not show that the audit is required by law. The firm should discuss the matter with management and, if it is not resolved, decline unless management agrees in writing to acknowledge its responsibilities.

Exam tips

Write the two preconditions by name every time. Examiners look for "acceptable financial reporting framework" and "management's responsibilities".
In case studies, use provision, facts, conclusion. Never skip the facts step.
Learn management's responsibilities as Prepare, Control, Access. It helps in both MCQs and written answers.
Link this topic to the engagement letter, as questions often ask what the letter should contain after preconditions are met.
Check who the question says agrees the terms. Say "management or those charged with governance" if not specified.

Practice questions from Ethics and Terms of Audit Engagements

Preconditions for an Audit and Agreeing Audit Terms: frequently asked questions

What are the preconditions for an audit under SA 210?

There are two. The financial reporting framework must be acceptable, and management must acknowledge and understand its responsibilities. If either is missing, the auditor should not accept the engagement unless required by law or regulation to do so. Where law prescribes the audit but the framework is unacceptable, SA 210 sets three conditions: additional disclosures, an Emphasis of Matter paragraph, and no statement in the report that the audit was conducted in accordance with SAs.

What is management's responsibility in an audit engagement letter?

Management is responsible for preparing the financial statements under the applicable framework and for maintaining the internal control it considers necessary. It must also give the auditor access to all relevant information and people. The letter records this in writing.

Is an engagement letter compulsory under SA 210?

SA 210 requires the agreed terms to be recorded in an audit engagement letter or other suitable form of written agreement. The letter is the usual form. Study its contents with the separate topic on the engagement letter.

Who agrees the audit terms with the auditor?

The auditor agrees the terms with management or those charged with governance, as appropriate. In a company, this is often the board or audit committee, depending on the circumstances.