SA 210 (Revised): Terms of Audit Engagement

The Revised Standard on Auditing (SA 210) highlights the fundamental considerations for independent auditors when agreeing to the terms of an audit engagement with management or 'Those Charged with Governance'.

Introduction and Scope

SA 210 delineates the auditor's responsibilities in formulating the audit engagement terms. It establishes audit preconditions, the engagement terms, potential changes, and the delineation of responsibilities between management and auditors.

Objective

The auditor's aim is to pursue an audit engagement only when a mutually agreed basis is evident, which involves:

1. Ensuring preconditions for the audit are satisfied.
2. Reaching a mutual understanding with management.

Key Definitions

Preconditions for an Audit: Utilizing a suitable financial reporting framework for financial statement preparation, and ensuring management agrees, along with those charged with governance, to the audit's foundational terms.

Management: Herein refers to 'management and, where applicable, those charged with governance'.

Audit Preconditions

If preconditions aren't met and no agreement occurs with management discussions, an audit engagement should not be accepted unless legally mandated.

Limitation on Audit Scope

An auditor must decline an engagement if management imposes scope limitations leading to a disclaimer of opinion, unless required by law.

Agreement on Audit Engagement Terms

• The audit engagement's terms must be mutually agreed with management.
• These terms should be documented in an audit engagement letter or another written form, encompassing:

• Audit objectives and scope.
• Responsibilities of the auditor and management.
• Identification of the financial reporting framework applicable.
• Anticipated form and content of auditor reports, including exceptions.

If specific laws or regulations govern the audit engagement terms, they should be referenced, and management should acknowledge its responsibilities, rather than detailing the terms.

In recurring audits, assess if the audit engagement terms require revisions and remind the entity about the prevailing terms when necessary.

Acceptance of Changes in Audit Engagements

When audit engagements change significantly, such as ownership shifts or business type alterations, auditors must comply with certain requirements.

Additional Considerations in Engagement Acceptance

A. If there's a conflict between financial reporting standards and supplementary laws/regulations, discuss with management:

• The feasibility of satisfying additional requirements via extra financial statement disclosures.
• Amending the description as per the reporting framework in the financial statements.

B. If the above actions aren't viable, modify the auditor's opinion per SA 705 if necessary, especially if the prescribed framework is deemed unacceptable without proper disclosures.

C. If preconditions are unmet and law dictates proceeding, evaluate the misleading nature's impact on the report and reference this in the audit engagement terms.

D. If different report format or wording is legally required, determine if assurance might be misunderstood and whether additional clarification is warranted.

SA 210 becomes applicable for audits of financial statements for periods beginning on or after April 1, 2010.