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

Verma & Co., Chartered Accountants, are the statutory auditors of Rajdhani Foods Ltd. for the third consecutive year. The terms of engagement were agreed in the first year. In the current year there is no change in the entity's ownership, management, or the nature of the business, and the earlier terms remain suitable. What is the appropriate action under SA 210 regarding the engagement letter?

The auditor may decide not to send a fresh letter and simply remind the entity of the existing terms. SA 210 says that in recurring audits the auditor considers whether circumstances call for revised terms. With no change in ownership, management or business, the earlier terms continue to apply.

  1. AThe auditor must issue a fresh engagement letter every year without exception
  2. BThe auditor may decide not to send a new letter and instead remind the entity of the existing terms, since there is no factor requiring revisionCorrect
  3. CNo engagement letter is needed in later years because the appointment under the Companies Act replaces it
  4. DThe auditor should send a new letter only if the audit fee has been reduced

Explanation

SA 210 states that on recurring audits the auditor assesses whether circumstances require revising the terms and whether the entity needs to be reminded of existing terms. Where nothing has changed, the auditor may decide not to send a new letter. Annual re-issue is therefore not mandatory, and the statutory appointment does not replace the engagement letter's role.

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