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

M/s Rao & Co., Chartered Accountants, are approached by Veda Textiles Ltd. to audit its financial statements. Before accepting the engagement, the firm wants to follow the correct sequence under the Standards on Auditing. Which step is required by SA 210 as a precondition for an audit?

Under SA 210 the auditor must determine that the financial reporting framework is acceptable and obtain management's agreement that it acknowledges and understands its responsibilities. These are the preconditions for an audit. Contingent fees, family shareholding declarations and pre-acceptance draft reports are not SA 210 preconditions.

  1. ADetermining that the financial reporting framework to be applied is acceptable and obtaining management's agreement to its responsibilitiesCorrect
  2. BObtaining a representation from the auditor's family members about their shareholdings
  3. CFixing the audit fee as a percentage of the company's net profit
  4. DIssuing the audit report in draft to the company before accepting the engagement

Explanation

SA 210 requires the auditor to establish the preconditions for an audit: an acceptable financial reporting framework and management's acknowledgement of its responsibilities for preparing the financial statements, internal control and providing access to information. Fee fixed as a percentage of profit is a contingent fee and is prohibited, so option 3 is wrong. The other options are not preconditions under SA 210.

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