AU-C Section 210.06 (Part 3 of 3): The Premise of an Audit

AU-C Section 210.06b says:

"The auditor should...obtain the agreement of management that it acknowledges and understands its responsibility:

• for the preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework;
• for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; and
• to provide the auditor with
• access to all information of which management is aware that is relevant to the preparation and fair presentation of the financial statements, such as records, documentation, and other matters;
• additional information that the auditor may request from management for the purpose of the audit; and
• unrestricted access to persons within the entity from whom the auditor determines it necessary to obtain audit evidence."

An audit is conducted under the premise that management has the responsibility to prepare its own financial statements, design and implement its own internal control, and provide the Auditor with access to all information and personnel he needs to conduct his audit.

The Auditor can assist in preparing the financial statements using information provided by management (e.g., the trial balance, schedules, contracts, etc.); however, management must take full responsibility for the preparation of those financial statements as well as its internal controls.  There are different levels of responsibility between management and those charged with governance over the financial statements and internal controls, depending on the size or complexity of the entity (e.g., the execution and review/oversight functions).

The Auditor will request written representations from management that it has fulfilled its responsibilities according to the premise.  If management will not acknowledge its responsibilities, the Auditor will be unable to obtain sufficient appropriate evidence, and should consider not accepting the engagement.


Management must maintain appropriate internal control to ensure the financial statements are free from material misstatement, but internal controls will not prevent all misstatements (because of the limitations of an audit).  An audit under GAAS should not be used as a substitute for proper internal controls; as such, the Auditor is required to obtain from management an agreement that it has acknowledges and understands it has responsibility to design, implement, and maintain appropriate internal controls.  The internal control of the entity will reflect its needs, and need not be overly complex or costly.