Wiley Practitioner's Guide to GAAS 2017. Flood Joanne M.
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review of a public company's financial statements, or agreed-upon procedures engagement. The understanding should include:
1. The engagement's objectives and scope
2. Management's responsibilities
3. Auditor's responsibilities
4. The audit's limitations, the inherent limitations of internal control, and the risk that some misstatements may not be detected
5. Financial reporting framework
6. Expected form and content of the report
In addition, the auditor may want to:
● Elaborate on the scope of the audit by referencing regulations, laws, GAAS, ethical codes, and pronouncements of professional bodies, as applicable.
● Identify any communications in addition to the auditor's report.
● Discuss audit planning and performance, including composition of the audit team.
● Remind management about the expectation of written representation, the agreement to make available draft financial statements on a timely basis, and the agreement for management to inform the auditor of subsequent events or facts discovered after the date of the financial statements that may affect the financial statements.
● Detail fees and billing arrangements.
● Request management to acknowledge receipt of the engagement letter and to agree to the terms by signing the letter.
The auditor may also choose to address arrangements concerning the involvement of other auditors, specialists, internal auditors and other entity staff, and predecessor auditors. Restrictions on auditor's liability, when not prohibited, audit documentation to be provided to other parties, additional services, arrangements with component auditors, and any other agreements with the entity may be included in the engagement letter. (AU-C 210.A23-.A26)
The auditor should document the understanding in writing. If the auditor fails to establish an understanding, the auditor should decline the engagement. (AU-C 210.09-.10) A sample engagement letter is included at the end of this chapter.
Initial Audits, Including Reaudits
Inquiry of the predecessor auditor is required because the predecessor may provide information that will assist the successor auditor in deciding whether to accept the engagement. The communication may be either written or oral. Both the predecessor and successor auditors should treat any information obtained from each other as confidential information. The successor auditor should request permission from the prospective client to make an inquiry of the predecessor prior to final acceptance of the engagement. However, the successor auditor may make a proposal for an audit engagement before having permission to inquire of the predecessor auditor.
The successor auditor should ask the prospective client to authorize the predecessor to respond fully to the successor auditor's inquiries. If a prospective client refuses to permit the predecessor auditor to respond or limits the response, the successor auditor should inquire as to the reasons and consider the implications of that refusal in deciding whether to accept the engagement. (AU-C 210.11) The successor auditor should make specific and reasonable inquiries of the predecessor about the following four matters:
1. Information about management's integrity
2. Disagreements with management about accounting principles, auditing procedures, or other significant matters
3. Communications to those charged with governance and responsibility regarding fraud, noncompliance with laws or regulations, and matters related to internal control
4. The predecessor auditor's understanding of the reasons for the change of auditors
(AU-C 210.A31)
The predecessor auditor should respond promptly, fully, and factually. However, if the predecessor decides, due to unusual circumstances such as impending, threatened, or potential litigation; disciplinary proceedings; or other unusual circumstances, not to respond fully, he or she should indicate that the response is limited. Also, if more than one auditor is considering accepting the audit, the predecessor auditor does not have to respond to inquiries until an auditor has been selected by the entity and has accepted the engagement. Any information exchanged between the predecessor and successor auditors should be considered confidential. (AU-C 210.A28-A30)
If the successor auditor receives a limited response, that auditor should consider the implications of the limited response in deciding whether to accept the engagement.
Recurring Audits
For a recurring audit, the auditor should evaluate whether the terms of the engagement need to be changed. The auditor should also remind the client about the existing terms of engagement.
Change in Terms
If the client requests a change in the terms, the auditor must ensure that there is a reasonable justification for the change. So, too, if prior to completion of an audit, the client requests a change to an engagement with a lower level of assurance, the auditor must be satisfied that a reasonable justification for doing so exists.
Certain factors may warrant a change in the terms of engagement for a recurring engagement. These might include, for example, changes in management or ownership, in legal or regulatory requirements, in the size of the entity, or in the financial reporting framework. (AU-C 210.A33) If the terms are changed, the auditor and management should document in writing the mutually agreed-upon change. (AU-C 210.13-16) If, however, the auditor concludes there is no reasonable justification for a change in terms and management does not allow the auditor to continue the original audit, the auditor must take these three steps:
1. Withdraw from the engagement.
2. Communicate the situation to those charged with governance.
3. Determine whether the auditor has any legal, contractual, or other obligation to report the circumstances to owners, regulators, or other parties.
(AU-C 210.17)
Illustration
Illustration 1. Example of an Audit Engagement Letter (from AU-C 210.A42)
AU-C 220 QUALITY CONTROL FOR AN ENGAGEMENT CONDUCTED IN ACCORDANCE WITH GENERALLY ACCEPTED AUDITING STANDARDS
AU-C Original Pronouncements
Applicability
AU-C 220 addresses specific responsibilities of the auditor regarding quality control standards for an audit of financial statements. Quality control is the responsibility of the audit firm. AU-C 220 also addresses supervision of an audit.
AU-C 220 Definitions of Terms
Source: AU-C 220.09
Engagement partner. The partner or other person in the firm who is responsible for the audit engagement and its performance and for the auditor's report issued on behalf of the firm and who, when required, has the appropriate authority from a professional, legal, or regulatory body.
Engagement quality control review. A process designed to provide an objective evaluation, before the report is released, of the significant judgments the engagement team made and the conclusions it reached in formulating the auditor's report. The engagement quality control review process is only for those audit engagements, if any, for which the firm has determined that an engagement quality control review is required, in accordance with its policies and procedures.
Engagement quality control reviewer. A partner, other person in the firm, suitably qualified external person, or team made up of such individuals, none of whom is part of the engagement team, with sufficient and appropriate experience and authority to objectively evaluate the significant judgments that the engagement team made and the conclusions it reached in formulating the auditor's report.
Engagement