ISA 210 Agreeing the Terms of Audit Engagements requires auditors to agree the terms of an engagement with those charged with governance and formalise these in an engagement letter.
Required:
(a) Identify and explain TWO factors which would indicate that an engagement letter for an existing audit client should be revised. (2 marks)
(b) List SIX matters which should be included within an audit engagement letter. (3 marks)
Which TWO of the following should be included in an audit engagement letter?
(1) Objective and scope of the audit
(2) Results of previous audits
(3) Management’s responsibilities
(4) Need to maintain professional scepticism
A. 1 and 2
B. 1 and 3
C. 2 and 4
D. 3 and 4
Salt & Pepper & Co (Salt & Pepper) is a firm of Chartered Certified Accountants which has seen its revenue decline steadily over the past few years. The firm is looking to increase its revenue and client base and so has developed a new advertising strategy where it has guaranteed that its audits will minimise disruption to companies as they will not last longer than two weeks.
In addition, Salt & Pepper has offered all new audit clients a free accounts preparation service for the first year of the engagement, as it is believed that time spent on the audit will be reduced if the firm has produced the financial statements.
The firm is seeking to reduce audit costs and has therefore decided not to update the engagement letters of existing clients, on the basis that these letters do not tend to change much on a yearly basis.
One of Salt & Pepper’s existing clients has proposed that this year’s audit fee should be based on a percentage of their final pre-tax profit. The partners are excited about this option as they believe it will increase the overall audit fee.
Salt & Pepper has recently obtained a new audit client, Cinnamon Brothers Co (Cinnamon), whose year end is 31 December. Cinnamon requires their audit to be completed by the end of February; however, this is a very busy time for Salt & Pepper and so it is intended to use more junior staff as they are available.
Additionally, in order to save time and cost, Salt & Pepper have not contacted Cinnamon’s previous auditors.
Required:
State FOUR matters that should be included within an audit engagement letter. (2 marks)
ISA 210 Agreeing the Terms of Audit Engagements provides guidance on the content of engagement letters and deals with the auditor’s responsibilities in agreeing the terms of the audit engagement with management.
Required:
(i) State the purpose of an engagement letter. (1 mark)
(ii) List SIX matters that should be included within an audit engagement letter. (3 marks)
ISA 210 Terms of Audit Engagements explains the content and use of engagement letters.
Required:
State SIX items that could be included in an engagement letter