".09 The auditor should agree upon the terms of the audit engagement with management or those charged with governance, as appropriate. (Ref: par. .A20–.A21)
.10 The agreed-upon terms of the audit engagement should be documented in an audit engagement letter or other suitable form of written agreement and should include the following: (Ref: par. .A22–.A26)
- The objective and scope of the audit of the financial statements
- The responsibilities of the auditor
- The responsibilities of management
- A statement that because of the inherent limitations of an audit, together with the inherent limitations of internal control, an unavoidable risk exists that some material misstatements may not be detected, even though the audit is properly planned and performed in accordance with GAAS
- Identification of the applicable financial reporting framework for the preparation of the financial statements
- Reference to the expected form and content of any reports to be issued by the auditor and a statement that circumstances may arise in which a report may differ from its expected form and content."
Depending on the size and complexity of the organization, the Auditor should agree on the terms of the engagement with management or those charged with governance, or both. The agreement on these terms includes the agreement by management of its responsibilities laid out in AU-C Section 210.06. This is required even if the audit is contracted by a third party.
An engagement letter or agreement should be put into place so that both parties understand their responsibilities, and it reduces the risk that management relies on the Auditor to perform the duties that are management's responsibilities.
The engagement letter must make reference to the following items:
- Elaboration of the scope of the audit, including reference to applicable legislation, regulations, GAAS, and ethical and other pronouncements of professional bodies to which the auditor adheres
- The form of any other communication of results of the audit engagement
- Arrangements regarding the planning and performance of the audit, including the composition of the audit team
- The expectation that management will provide written representations
- The agreement of management to make available to the auditor draft financial statements and any accompanying other information in time to allow the auditor to complete the audit in accordance with the proposed timetable
- The agreement of management to inform the auditor of events occurring or facts discovered subsequent to the date of the financial statements, of which management may become aware, that may affect the financial statements
- The basis on which fees are computed and any billing arrangements
- A request for management to acknowledge receipt of the audit engagement letter and to agree to the terms of the engagement outlined therein, as may be evidenced by their signature on the engagement letter
- Arrangements concerning the involvement of other auditors and specialists in some aspects of the audit
- Arrangements concerning the involvement of internal auditors and other staff of the entity
- Arrangements to be made with the predecessor auditor, if any, in the case of an initial audit
- Any restriction of the auditor's liability when not prohibited
- Any obligations of the auditor to provide audit documentation to other parties
- Additional services to be provided, such as those relating to regulatory requirements
- A reference to any further agreements between the auditor and the entity
- the component engaged the auditor
- if a separate auditor's report is being issued on the component
- it's is required for legal reasons
- if the parent doesn't own a substantial piece of it
- if the parent's management is generally independent of the management of the component
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