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

Mehta & Co., Chartered Accountants, are approached by Sunrise Textiles Ltd. to audit its financial statements. Before accepting, the firm wants to ensure that the preconditions for an audit exist. Under SA 210, which of the following is a precondition the auditor must establish?

The precondition is that management acknowledges and understands its responsibility for preparing financial statements under the applicable framework. SA 210 also requires responsibility for internal control and access to information. The auditor does not choose the framework or prepare the statements, and advance fee payment is not a precondition.

  1. AManagement acknowledges its responsibility for the preparation of financial statements in accordance with the applicable financial reporting frameworkCorrect
  2. BThe auditor is permitted to prepare the financial statements for the entity
  3. CManagement agrees that the auditor will decide the applicable financial reporting framework
  4. DThe entity agrees to pay the audit fee in advance

Explanation

SA 210 requires the auditor to determine that the financial reporting framework is acceptable and to obtain management's agreement that it acknowledges and understands its responsibility for preparing the financial statements, for internal control, and for providing access to information. Choosing the framework is management's role, not the auditor's. Advance payment of fees is not a precondition.

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