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

M/s Kulkarni & Associates, Chartered Accountants, have been approached by Sundaram Textiles Ltd. to audit its financial statements. Before accepting the engagement, the engagement partner wants to establish that the preconditions for an audit exist. Which of the following is a precondition for an audit under SA 210?

The correct answer is management's acknowledgement and understanding of its responsibilities. Under SA 210, management must accept responsibility for preparing the financial statements under an acceptable framework, for internal control, and for giving the auditor full access to information and people. Without this, the audit preconditions are not met.

  1. AManagement's acknowledgement and understanding of its responsibility for preparing the financial statements and providing the auditor access to all relevant informationCorrect
  2. BThe auditor's agreement to guarantee that no fraud exists in the financial statements
  3. CManagement's agreement that the auditor will prepare the financial statements and be responsible for them
  4. DThe entity's agreement that the audit fee will be contingent on the profit reported

Explanation

SA 210 requires, as a precondition, that management acknowledges and understands its responsibilities: preparing financial statements under an acceptable framework, maintaining internal control, and giving the auditor access to information and persons. The auditor does not guarantee absence of fraud, does not prepare the financial statements as the auditor's responsibility, and a profit-contingent fee is not a precondition (and is prohibited).

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