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CA Intermediate · Auditing and Ethics · Ethics and Terms of Audit Engagements

Before the audit of Narmada Pharma Ltd begins, the auditor, CA Sheth, sends an engagement letter. The company's CFO says that, since the audit is statutory and the Companies Act already defines the auditor's duties, no engagement letter is necessary. What is the correct view under SA 210?

The auditor should still agree and document the terms of engagement in an engagement letter. Although the Companies Act prescribes the auditor's duties, SA 210 requires written terms to avoid misunderstanding, and only matters already fully covered by law may be left out of the letter.

  1. AThe CFO is right, since a statutory audit does not need any engagement letter
  2. BAn engagement letter is required only if the auditor is a firm and not an individual
  3. CThe auditor should still agree and record the terms of engagement, as law may prescribe the duties but the letter confirms the terms and avoids misunderstanding, though some content may be omitted where law prescribes itCorrect
  4. DThe engagement letter is required only for audits of listed companies

Explanation

SA 210 requires the auditor to agree the terms of engagement with management or those charged with governance, and these are recorded in an engagement letter or other written form. Where law prescribes the duties in sufficient detail, the auditor need not include them in the letter, but the terms are still documented. The CFO's view is therefore incorrect.

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