Acca aa s21 Notes

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4. Preconditions for an audit
According to ISA 210 
Agreeing the Terms of Audit Engagements
, an audit can only be accepted (or 
continued), if:
๏
The ‘preconditions for an audit’ are present:
‣
The financial reporting framework for the preparation of the financial statements is 
acceptable
‣
Management agrees that it acknowledges and understands its responsibilities for the 
financial statements (including internal control) and to provide the auditor with information 
necessary for the audit.
๏
There is a common understanding of the terms of the audit engagement.
These matters must be formally documented in an engagement letter. 
An audit engagement must be declined (or discontinued) if:
๏
Management or those charged with governance impose a limitation on the scope of the audit 
(ie the auditor will not be able to form an opinion)
๏
The preconditions are not present (eg the financial reporting framework does not provide 
suitable criteria for an assurance engagement).
5. The engagement letter
Upon appointment, auditors should send an engagement letter to their new client.
Engagement letters are often regarded as rather dull documents, sent once and then forgotten. 
However, they are of crucial importance because they set out the contractual relationship between 
the auditor and the client. If the engagement letter is not sent out it’s very difficult for an auditor 
subsequently to complain that the client hasn’t done what was expected, or it might be difficult for 
the auditor to defend the firm against a claim that the auditor has not done what was expected. 
Engagement letters:
๏
Define the auditor’s responsibilities
๏
Provide written evidence of the auditor’s acceptance of the appointment.
๏
Should be sent to the board of directors or audit committee prior to the first audit.
๏
Identify any reports to be produced in addition to the auditor’s report. For example, for banking 
or insurance clients who may come under additional scrutiny.
๏
Should be updated for all changes. For example, if the auditor begins to undertake tax work for 
the client.