ISA 210

Agreeing the Terms of Audit Engagements

1Objective and scope

ISA 210 deals with the auditor's responsibilities in agreeing the terms of the audit engagement with management and, where appropriate, those charged with governance. It covers establishing that the preconditions for an audit are present, confirming a common understanding of the terms, and what to do when management asks to change the terms or imposes a limitation before the audit begins. It works alongside ISQM 1's acceptance and continuance component: ISQM 1 decides whether the firm may take the client, ISA 210 decides whether an audit can be performed and on what terms.

The auditor's objective is to accept or continue an audit engagement only when the basis on which it is to be performed has been agreed, by establishing that the preconditions for an audit are present and confirming a common understanding of the terms between the auditor and management.

2Key definitions

3Requirements

Establishing the preconditions

• Determine whether the financial reporting framework to be applied is acceptable, considering the nature of the entity, the purpose of the statements, the nature of the statements (complete set or single statement) and whether law or regulation prescribes the framework. IFRS, IFRS for SMEs and IPSAS are acceptable general purpose frameworks; a framework prescribed by Kenyan law for a class of entity is acceptable unless it is deficient.
• Obtain management's agreement that it acknowledges and understands its responsibilities for preparing the financial statements in accordance with the framework (including fair presentation where relevant), for such internal control as is necessary to enable preparation free from material misstatement, and for providing access to all information relevant to the statements, additional information the auditor requests, and unrestricted access to persons within the entity.
• If the preconditions are not present, discuss the matter with management; if the framework is unacceptable or management will not agree to the premise, do not accept the engagement unless law or regulation requires it. Where law prescribes an unacceptable framework, accept only if the deficiencies are adequately explained in the statements and the report, and the report does not say the statements are prepared in accordance with the ISAs' fair presentation wording without that caveat.
• If management imposes a limitation on scope before acceptance that the auditor believes will result in a disclaimer, do not accept the engagement unless required to by law or regulation.

Agreeing the terms

The agreed terms are recorded in an audit engagement letter or other suitable written agreement and must include the objective and scope of the audit, the responsibilities of the auditor, the responsibilities of management, identification of the applicable financial reporting framework, and reference to the expected form and content of any reports (with a statement that circumstances may cause the report to differ). Where law or regulation prescribes the terms in sufficient detail, the auditor need not record them again but must still obtain management's agreement to the premise.

Recurring audits and changes in terms

• On a recurring audit the auditor assesses whether circumstances require revised terms (a change in senior management, ownership, nature or size of the business, legal or reporting requirements, or a misunderstanding of the audit's objective) and whether management needs a reminder of the existing terms. A fresh letter is good practice whenever terms change.
• If management asks, before completion, to change the audit to an engagement conveying a lower level of assurance (a review) or to a related service, the auditor agrees only where there is reasonable justification: a change in circumstances affecting the need for the service, or a misunderstanding about the nature of the audit. A request driven by the auditor's inability to obtain evidence or by unfavourable findings is not reasonable justification.
• If the terms are changed and the auditor agrees, new terms are recorded, and the report on the new engagement must not refer to the original audit engagement or to any procedures performed under it (except where the new engagement is an agreed-upon procedures engagement, when that reference is normal).
• If the auditor cannot agree to a change and management does not permit continuation of the original audit, the auditor withdraws where possible and considers whether any obligation exists to report the circumstances to those charged with governance, owners or regulators.

4Documentation and reporting

The engagement letter, signed and returned by the client, is itself the documentation, filed under ISA 230 as evidence that the terms were agreed before the audit began. Where the auditor accepts an engagement despite a legally prescribed deficient framework or legally prescribed layout of the report, the report must not include the ISA reference to the statements being fairly presented unless the additional explanation required by ISA 210 is given; and if the prescribed report wording is so different from the ISA report that users could be misled, the auditor evaluates whether to add explanation or, if that is not possible, whether the audit can be accepted at all. The letter must be revisited whenever a request to change the engagement is accepted.

5Examinable focus