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

Mehta & Co., a firm of Chartered Accountants, is approached by Sundaram Textiles Ltd. to audit its financial statements. Before accepting the engagement, the firm wants to confirm that the preconditions for an audit exist. Which of the following is a precondition for an audit under SA 210?

The precondition under SA 210 is that management acknowledges and understands its responsibility for preparing the financial statements under the applicable framework, for internal control, and for giving the auditor access to information. Without this, the basis on which an audit is conducted does not exist.

  1. AThe management acknowledges its responsibility for preparing the financial statements in accordance with the applicable financial reporting framework and for internal control necessary for that purposeCorrect
  2. BThe auditor guarantees that all frauds in the entity will be detected during the audit
  3. CThe auditor is allowed to prepare the financial statements and then express an opinion on them as management's representative
  4. DThe entity agrees that the audit fee will be a percentage of the profits reported

Explanation

SA 210 requires the auditor to establish that management acknowledges and understands its responsibility for preparing financial statements under the applicable framework, for internal control, and for providing access to information. An audit cannot guarantee detection of all frauds. A contingent fee based on profit is not a precondition and would be prohibited for audit.

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