Statement on Auditing Standards – SA 210
Scope and Objective
The Accounting standards discusses a specific auditing standard, Standard on Auditing (SA) 210, which outlines the auditor’s responsibilities when agreeing to the terms of an audit engagement with management and those charged with governance. An audit engagement is an agreement between an auditor and an entity (usually a company) to conduct an audit of the entity’s financial statements.
SA 210 emphasizes the importance of establishing preconditions for the audit that are within the control of the entity. These preconditions include the use of an acceptable financial reporting framework by management and agreement on the premise of the audit.
In addition, the SA highlights the importance of the auditor and management agreeing on the terms of the engagement. This ensures that both parties have a common understanding of the scope and objectives of the audit, and the responsibilities of each party.
SA 210 also mentions the importance of ethical requirements being met before accepting an audit engagement. These requirements include independence and professional competence. SA 210 notes that the auditor’s responsibilities with respect to ethical requirements are dealt with in another auditing standard, SA 2201.
Finally, the text provides a definition of “preconditions for an audit” as the use of an acceptable financial reporting framework and agreement on the premise of the audit. The term “management” is also defined to include those charged with governance.
Overall, SA 210 provides guidance for auditors in agreeing to the terms of an audit engagement with an entity, including ensuring that preconditions for the audit are met and that there is a common understanding between the auditor and management (and those charged with governance) of the terms of the engagement.
Preconditions for an audit
Accounting standards is discussing the preconditions that must be met before an audit can take place. The first precondition is that the auditor must determine whether the financial reporting framework that will be used to prepare the financial statements is acceptable. This means that the criteria used to evaluate or measure the financial statements must be suitable and available to intended users. The financial reporting framework provides the criteria that the auditor will use to audit the financial statements. It also highlights that there are two types of financial statements – general purpose financial statements and special purpose financial statements. General purpose financial statements are designed to meet the common financial information needs of a wide range of users, while special purpose financial statements are designed to meet the financial information needs of specific users. The type of financial reporting framework that will be used depends on the intended users of the financial statements.
It provides factors that are relevant to the auditor’s determination of the acceptability of the financial reporting framework. These include the nature of the entity, the purpose of the financial statements, the nature of the financial statements, and whether law or regulation prescribes the applicable financial reporting framework.
It also discusses deficiencies in the applicable financial reporting framework, which may be encountered after the audit engagement has been accepted. In such cases, management may decide to adopt another framework that is acceptable, and new terms of the audit engagement will be agreed to reflect the change in the framework.
General purpose frameworks
The accounting standards discusses the acceptability of general-purpose frameworks for financial reporting, which are used to prepare financial statements for public consumption. There is currently no globally recognized basis for judging the acceptability of general-purpose frameworks, so financial reporting standards established by authorized organizations are presumed to be acceptable as long as they follow an established and transparent process that considers the views of a wide range of stakeholders. Examples of such standards include Accounting Standards issued by the Institute of Chartered Accountants of India (ICAI), International Financial Reporting Standards (IFRSs) issued by the International Accounting Standards Board, and International Public Sector Accounting Standards (IPSASs) issued by the International Public Sector Accounting Standards Board.
The auditor is required to determine the acceptability of the financial reporting framework used in the preparation of financial statements. In some cases, law or regulation may prescribe the financial reporting framework to be used, which is presumed to be acceptable unless there are indications to the contrary. If the framework is not considered acceptable, the auditor must obtain the agreement of management that it acknowledges and understands its responsibilities.
The auditor’s role does not involve taking responsibility for the preparation of financial statements or for the entity’s related internal control, and the auditor has a reasonable expectation of obtaining the information necessary for the audit insofar as management is able to provide or procure it. To avoid misunderstanding, agreement is reached with management that it acknowledges and understands its responsibilities. The responsibilities for financial reporting are divided between management and those charged with governance, and the way in which they are divided will vary according to the resources and structure of the entity and any relevant law or regulation.
SA 580 requires the auditor to request written representations from management that it has fulfilled certain of its responsibilities. If management will not acknowledge its responsibilities or agree to provide written representations, the auditor will be unable to obtain sufficient appropriate audit evidence. In such circumstances, it would not be appropriate for the auditor to accept the audit engagement, unless law or regulation requires the auditor to do so.
Preparation of the Financial Statements
Accounting standards explains that financial reporting frameworks include requirements for the presentation of financial statements, and in fair presentation frameworks, there is a specific reference to the responsibility to ensure that the financial statements will “give a true and fair view.” Management is responsible for maintaining internal control to enable the preparation of financial statements that are free from material misstatement. The auditor is required to obtain the agreement of management that it acknowledges and understands its responsibility for internal control, but this does not imply that the auditor will find that internal control maintained by management has achieved its purpose or will be free of deficiencies. The term “internal control” encompasses a wide range of activities, and it is up to management to determine what internal control is necessary. Additional information may be requested from management for the purpose of the audit, including matters related to other information in accordance with SA 720(Revised).
Considerations relevant to smaller entities
The accounting standards have a various considerations and requirements relevant to auditors when engaging with smaller entities to conduct an audit of their financial statements.
The first consideration discussed is the need to agree on the terms of the audit engagement with management or those charged with governance. This agreement helps to ensure that there is no misunderstanding about the respective responsibilities of management and the auditor, particularly in cases where a third party has assisted with the preparation of the financial statements. The engagement terms should include the responsibilities of management for preparing the financial statements in accordance with the applicable financial reporting framework, establishing and maintaining internal control to enable the preparation of financial statements that are free from material misstatement, and providing the auditor with access to all relevant information, documentation, and persons within the entity.
The importance of the auditor communicating any limitations on the scope of their work to management and ensuring that the preconditions for an audit are present before accepting an engagement. If the auditor believes that a limitation on the scope of their work will result in them disclaiming an opinion on the financial statements, they should not accept such a limited engagement unless required by law or regulation to do so.
The engagement terms should be recorded in an audit engagement letter or other suitable form of written agreement. The auditor may include various matters in the engagement letter, such as the scope of the audit, the auditor’s responsibilities, the composition of the audit team, the expectation that management will provide written representations, the arrangement for billing, and any request for management to acknowledge receipt of the audit engagement letter and agree to the terms of the engagement outlined therein. The form and content of the audit engagement letter may vary depending on the entity, and the letter may also make reference to applicable legislation, regulations, SAs, and ethical and other pronouncements of professional bodies to which the auditor adheres.
In some cases, the engagement letter may make reference to the possibility of the auditor communicating key audit matters in the auditor’s report, and in certain jurisdictions, it may be necessary for the auditor to include a reference to such possibility to retain the ability to do so. The engagement letter may also include arrangements concerning the involvement of other auditors, experts, internal auditors, or other staff of the entity, as well as any restrictions on the auditor’s liability or any further agreements between the auditor and the entity.
Recurring audits refer to audits that are conducted on a regular basis, such as annual audits. The auditor is responsible for assessing whether there are any circumstances that require the terms of the audit engagement to be revised or whether there is a need to remind the entity of the existing terms of the audit engagement.
The auditor may decide not to send a new audit engagement letter or other written agreement for each period, but there are certain factors that may require the terms of the engagement to be revised or the entity to be reminded of the existing terms.
These factors include:
- Any indication that the entity misunderstands the objective and scope of the audit.
- This may occur if the entity has made changes to its operations or financial reporting that the auditor was not aware of or if there is a miscommunication regarding the scope of the audit.
- Any revised or special terms of the audit engagement.
- If there are any changes to the scope or objective of the audit engagement or any additional services to be provided by the auditor, the terms of the engagement may need to be revised.
- A recent change of senior management.
- A change in senior management may impact the entity’s control environment or the auditor’s relationship with the entity, which may require the terms of the engagement to be revised.
- A significant change in ownership.
- A change in ownership may impact the entity’s operations or financial reporting, which may require the terms of the engagement to be revised.
- A significant change in the nature or size of the entity’s business.
- If the entity has undergone a significant change in its operations or has grown in size, this may impact the scope of the audit and may require the terms of the engagement to be revised.
- A change in legal or regulatory requirements.
- A change in legal or regulatory requirements may impact the entity’s financial reporting, which may require the terms of the engagement to be revised.
- A change in the financial reporting framework adopted in the preparation of the financial statements.
- If the entity has changed its financial reporting framework, this may impact the auditor’s responsibilities and the terms of the engagement may need to be revised.
- A change in other reporting requirements.
- If the entity has additional reporting requirements, such as regulatory reporting or reporting to stakeholders, this may impact the auditor’s responsibilities and the terms of the engagement may need to be revised.
Acceptance of a Change in the Terms of the Audit Engagement
Accounting standard conditions and considerations for accepting a change in the terms of an audit engagement. The auditor should not agree to a change in the terms of the audit engagement without a reasonable justification. A change in circumstances affecting the entity’s requirements or a misunderstanding concerning the nature of the service originally requested may be considered reasonable, while a change relating to incorrect, incomplete, or unsatisfactory information may not be considered reasonable. If the auditor agrees to change the audit engagement to a review or related service, they should assess any legal or contractual implications of the change and record the new terms of the engagement in writing. If the auditor is unable to agree to a change in the terms of the audit engagement, they may need to withdraw from the engagement and report the circumstances to other parties if obligated to do so.
Additional Considerations in Engagement Acceptance
Additional considerations that auditors should take into account when accepting an engagement. Specifically, the potential impact of laws or regulations that supplement financial reporting standards the accounting standards established by an authorized or recognized standards-setting organization.
In such cases, auditors need to apply the financial reporting framework that includes both the established financial reporting standards and the additional requirements mandated by law or regulation, as long as they do not conflict with the established financial reporting standards. This can include situations where the law or regulation requires disclosures beyond what is already required by the financial reporting standards or limits the range of acceptable choices that can be made within the standards.
The law or regulation may require specific wording to be included in the auditor’s opinion or report. For example, the law or regulation may require the auditor to use the phrases “present fairly, in all material respects” or “give a true and fair view” in cases where the applicable financial reporting framework prescribed by law or regulation would otherwise have been unacceptable. However, this may conflict with the requirements of the Standards on Auditing (SAs).
If the prescribed wording or format of the auditor’s report is significantly different from the requirements of the SAs and cannot be mitigated through additional explanation, the auditor may consider including a statement in the auditor’s report that the audit is not conducted in accordance with SAs. Nonetheless, the auditor is still encouraged to apply the SAs to the extent practicable.
Finally, such as government entities, specific requirements may exist within the legislation governing the audit mandate. For example, the auditor may be required to report directly to a regulator or the legislative body or stakeholders if the entity attempts to limit the scope of the audit.
Overall, the accounting standards emphasizes the need for auditors to carefully consider the impact of laws and regulations on the audit engagement and to take appropriate measures to comply with both the requirements of the SAs and any additional requirements imposed by law or regulation.
Agreeing the Terms of Audit Engagements
SA 210 sets out the requirements for agreeing on the terms of audit engagements. Specifically, the updates concern the financial reporting standards that can be used for the preparation and presentation of financial statements in India.
The financial reporting standards used in India can be either “Accounting Standards issued by the Institute of Chartered Accountants of India or Accounting Standards, notified under Companies (Accounting Standards) Rules, 2006” or “Accounting Standards for Local Bodies issued by the Institute of Chartered Accountants of India (ICAI)”. As a result, the examples of financial reporting standards have been updated and some references have been changed.
SA 210 also mentions the deletion of specific references to the applicability of the Standard to public sector entities. This is because the standards apply equally to all entities, regardless of their form, nature, or size, and there is no longer a need to specify that public sector entities are covered by the Standard. However, it also notes that there may still be situations in which non-public entities are subject to similar requirements under the statute or regulation, and in these cases, the Standard would still apply to them.
Acceptability of General-Purpose Frameworks
The accounting standards attributes that a financial reporting framework should exhibit in order to produce financial statements that are useful for the intended users. These attributes include relevance, completeness, reliability, neutrality, and understandability.
Relevance refers to the information provided in the financial statements being relevant to the nature of the entity and the purpose of the financial statements. For instance, in the case of a business enterprise that prepares general-purpose financial statements, relevance is assessed in terms of the information necessary to meet the common financial information needs of a wide range of users in making economic decisions.
Completeness refers to ensuring that all transactions, events, account balances, and disclosures that could affect conclusions based on the financial statements are not omitted.
Reliability refers to the information provided in the financial statements reflecting the economic substance of events and transactions and not merely their legal form, and resulting in reasonably consistent evaluation, measurement, presentation, and disclosure when used in similar circumstances.
Neutrality refers to contributing to information in the financial statements that is free from bias.
Understandability refers to ensuring that the information in the financial statements is clear, comprehensive, and not subject to significantly different interpretation.
When an auditor is assessing the financial reporting framework of an entity, they may decide to compare the accounting conventions to an existing financial reporting framework that is generally accepted, such as International Financial Reporting Standards (IFRSs). If differences are identified, the auditor must consider the reasons for the differences and whether they could result in financial statements that are misleading.
SA 210 also notes that a conglomeration of accounting conventions that is tailored to individual preferences is not acceptable as a financial reporting framework for general-purpose financial statements. Similarly, a compliance framework is not acceptable unless it is generally accepted in the industry to which the entity belongs by preparers and users.
Quiz: Agreeing the Terms of Audit Engagements
1. SA 210 outlines the auditor’s responsibilities when agreeing to the terms of an audit engagement with?
b) Management and those charged with governance
c) Regulatory authorities
d) External consultants
2. Preconditions for an audit engagement include?
a) Use of an acceptable financial reporting framework and agreement on the premise of the audit
b) Approval from shareholders and management
c) Completion of internal control assessments
d) Disclosure of audit fees
3. Ethical requirements that need to be met before accepting an audit engagement include?
a) Compliance with tax regulations
b) Agreement on audit fees
c) Independence and professional competence
d) Use of industry-specific reporting frameworks
4. General purpose financial statements are designed to meet the financial information needs of?
a) External auditors only
b) Government agencies
c) Specific user groups
d) A wide range of users
5. The acceptability of a financial reporting framework for general-purpose financial statements is based on?
a) Its popularity in the industry
b) The number of regulations it adheres to
c) Its alignment with international standards
d) Its relevance, completeness, reliability, neutrality, and understand ability
6. In recurring audits, the terms of the audit engagement may need to be revised if?
a) The auditor’s fees have increased
b) The entity undergoes a significant change in ownership
c) The auditor changes their audit methodology
d) The financial reporting framework becomes outdate
7. When accepting a change in the terms of an audit engagement, the auditor should ensure?
a) The change benefits the auditor financially
b) The change aligns with the entity’s management preferences
c) There is a reasonable justification for the change
d) The change simplifies the audit process
8. Additional requirements imposed by laws or regulations should be considered in an audit engagement to?
a) Increase the complexity of the audit procedures
b) Ensure compliance with international auditing standards
c) Determine the auditor’s fees
d) Comply with both the requirements of the SAs and the applicable laws or regulations
9. The purpose of a financial reporting framework is to?
a) Establish internal control procedures
b) Ensure the accuracy of financial statements
c) Guide the preparation and presentation of financial statements
d) Determine the auditor’s independence requirements
10. The attributes that a financial reporting framework should exhibit include?
a) Relevance, completeness, reliability, neutrality, and understandability
b) Flexibility, timeliness, accuracy, and consistency
c) Complexity, innovation, specificity, and transparency
d) Efficiency, cost-effectiveness, accessibility, and popularity
11. The preconditions for an audit engagement include the use of an acceptable financial reporting framework and?
a) Agreement on audit fees
b) Disclosure of internal control procedures
c) Approval from regulatory authorities
d) Agreement on the premise of the audit
12. SA 210 emphasizes the importance of establishing preconditions for the audit that are within the control of the?
c) External consultants
d) Entity being audited
13. The auditor’s responsibilities with respect to ethical requirements in an audit engagement are dealt with in which auditing standard?
a) SA 210
b) SA 220
c) SA 580
d) SA 720
14. The acceptability of a financial reporting framework used for general-purpose financial statements depends on its?
a) Compliance with local laws and regulations
b) Popularity among shareholders
c) Ability to satisfy all user needs
d) Relevance, completeness, reliability, neutrality, and understand ability
15. When engaging with smaller entities, auditors should ensure there is a clear understanding of the respective responsibilities of?
a) The auditor and the external consultants
b) The auditor and the shareholders
c) Management and those charged with governance
d) The auditor and regulatory authorities
16. Recurring audits refer to audits that are conducted on a regular basis, such as?
a) Quarterly audits
b) Ad hoc audits
c) Continuous audits
d) Annual audits
17. The auditor may decide not to send a new audit engagement letter for each period in recurring audits if?
a) The auditor’s fees remain unchanged
b) The entity has not made any changes to its operations or financial reporting
c) The auditor’s report from the previous period was unqualified
d) The terms of the engagement have not changed
18. In the context of recurring audits, circumstances that may require the terms of the audit engagement to be revised include?
a) A change in the audit team composition
b) A change in the auditor’s fee structure
c) A recent change of senior management
d) The entity’s compliance with local regulations
19. Accepting a change in the terms of an audit engagement without a reasonable justification may?
a) Result in an unqualified audit opinion
b) Violate the auditor’s independence requirements
c) Trigger additional reporting requirements to regulatory authorities
d) Require the auditor to increase their audit fees
20. When accepting an audit engagement that involves additional requirements imposed by laws or regulations, the auditor should?
a) Ignore the additional requirements and focus only on the financial reporting standards
b) Seek legal advice to determine their liability
c) Comply with both the requirements of the SAs and the additional requirements
d) Inform management of the additional requirements and let them handle compliance