CS Professional · Compliance Management, Audit and Due Diligence

Audit Engagement: Acceptance, Independence, Letter and Planning

Audit engagement covers everything the auditor does before and at the start of an audit: accepting or continuing the client, checking independence, agreeing terms in an engagement letter, and planning the audit. In case questions, you state the rule, apply it to the facts, and conclude.

What this chapter covers

This chapter covers the start of an audit. You learn how an auditor decides to take on or continue a client, how independence and eligibility are checked, how the terms are agreed in writing, and how the audit is planned. It also covers the auditor's rights, duties and documentation.

The standards that matter most here are SA 210 (Agreeing the Terms of Audit Engagements) and SA 300 (Planning an Audit of Financial Statements). Under SA 300, at the beginning of the engagement the auditor performs procedures on client continuance, evaluates ethical requirements including independence, and establishes an understanding of the terms of engagement as SA 210 requires. Those three activities link the topics in this chapter.

This chapter feeds the rest of Paper 3, Audit and Due Diligence. Later chapters on risk assessment, evidence, reporting and due diligence assume that the engagement was properly accepted and planned. Treat it as the foundation, and keep your answers in the provision, analysis, conclusion format.

Paper 3 is a written, case-based paper, and Audit and Due Diligence carries 60 of its 100 marks. Questions on this chapter are usually short fact situations: a client asks to change terms, an auditor has a conflict, or a letter misses a clause. If you know the exact conditions in SA 210 and SA 300, you can score steadily with little reading. The same ideas also support answers in later chapters.

Audit Engagement: topics in the order to study them

1Appointment, Eligibility and Independence of AuditorStart with who can be the auditor and what independence means, because every later step assumes the auditor is eligible.
2Acceptance and Continuance of Client RelationshipsNext learn how the auditor decides to accept or continue, including ethics, independence and management integrity checks.
3Audit Engagement Letter and Terms of EngagementOnce a client is accepted, the terms are agreed and recorded in writing under SA 210, including changes in terms.
4Planning the Audit and Audit StrategyPlanning begins after the preliminary activities, so study it once acceptance and terms are clear.
5Auditor's Rights, Duties and Engagement DocumentationFinish with rights, duties and documentation, which tie the whole engagement together and suit final revision.

How to prepare Audit Engagement

Prepare this chapter by learning the standards' requirements first and then practising them on short case facts.

Read SA 210 and SA 300 once for structure. Note the sequence: preliminary activities, terms agreed, then planning.
List the five matters SA 210 requires in an engagement letter: objective and scope, auditor's responsibilities, management's responsibilities, the applicable financial reporting framework, and the expected form and content of reports with a statement that a report may differ.
Learn the change-in-terms rules as a chain: no change without reasonable justification; consider requests to lower assurance; record new terms in writing; if unable to agree and not permitted to continue, withdraw where possible and consider any duty to report.
Learn the eligibility and independence provisions of the Companies Act and the Chartered Accountants Act from your study material, with their exact conditions.
Write answers to three or four past or practice case questions in this order: rule, application to the facts, conclusion.
Draft a sample engagement letter outline from memory, then check it against the optional items such as fees, timetable, and written representations.
Revise the documentation requirements and the auditor's rights and duties from a one-page list.

Common mistakes in Audit Engagement

Listing engagement letter contents from memory without separating mandatory items from optional ones.
Fix: Keep two lists: the five required matters, and optional items such as fees, timetable, and written representations.
Saying the auditor can freely accept any change in terms the client requests.
Fix: State that the auditor shall not agree to a change without reasonable justification, then test the facts for it.
Forgetting what follows when no agreement on changed terms is reached.
Fix: Add the two steps: withdraw where law allows, and decide whether there is a duty to report to those charged with governance, owners or regulators.
Treating acceptance and independence checks as one-time events.
Fix: Note that SA 300 describes consideration of continuance and ethics as occurring throughout the engagement as circumstances change.
Writing general advice instead of applying the rule to the facts given.
Fix: Use the three-part structure and quote the specific facts, such as the entity, the request and the timing, in your analysis.

Last-day revision: Audit Engagement

SA 300 requires three activities at the start: client continuance procedures, ethics and independence evaluation, and understanding the terms under SA 210.
These initial procedures are completed before other significant audit activities.
For continuing clients, they often occur shortly after the previous audit.
Engagement terms are recorded in an engagement letter or other suitable written agreement.
SA 210 requires five matters in the letter: objective and scope, auditor's responsibilities, management's responsibilities, the reporting framework, and expected reports.
The letter must state that a report may differ from its expected form and content.
Where law already sets out these matters, the letter may only refer to the law and management's acknowledgement of its responsibilities.
The auditor should not accept a scope limitation likely to lead to a disclaimer, unless law requires it.
The auditor must not agree to a change of terms without reasonable justification.
If the request is to move to lower assurance, decide whether there is reasonable justification.
Agreed changes must be recorded in writing.
If the auditor cannot agree and is not allowed to continue, withdraw where law permits and consider reporting obligations.

Audit Engagement practice questions

Audit Engagement in other exams

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

Audit Engagement: frequently asked questions

Is an audit engagement letter always required?

The terms must be recorded in an engagement letter or another suitable form of written agreement. Where law already prescribes the objective, scope and responsibilities, the letter may only refer to that law and to management's acknowledgement of its responsibilities.

What must an engagement letter contain under SA 210?

It must cover the objective and scope of the audit, the auditor's responsibilities, management's responsibilities, the applicable financial reporting framework, and the expected form and content of reports. It must also say that a report may differ from its expected form and content.

Can an auditor accept a limited-scope engagement?

Not if management or those charged with governance impose a limitation that the auditor believes will lead to a disclaimer of opinion. The exception is where law or regulation requires the auditor to accept it.

What should I do if a client asks to change the terms mid-audit?

First ask whether there is reasonable justification. If you agree, record the new terms in writing. If you cannot agree and management will not let you continue the original engagement, withdraw where law permits and consider any reporting obligation.