Where the external auditor has decided to place reliance on the work of internal auditor, he should review the working papers to satisfy himself as to:-
i) Audit programs are adequate.
ii) The work is performed by trained staff and the work of assistants is properly supervised, reviewed and documented.
iii) Sufficient appropriate audit evidence was obtained.
iv) Conclusions made are appropriate.
v) Reports prepared are based on the work done.
vi) Exceptions or unusual items have been properly resolved. The external auditor should record all the working he has received. The external auditor should also test the work of internal auditor.
Testing the Work of Internal Auditing
It can be done in the following ways:
i) Re-performing the work done by internal auditor, on test basis, to ensure that the same results are achieved;
ii) Selecting a few similar items and perform independent test; and
iii) Observation of internal auditing procedures.
Terms of Audit Engagements Meaning and Objective
Audit Engagement Letter is written by the auditor to his client. The letter documents terms of engagement as agreed between the auditor and the client.
Following are the components of Audit Engagement Letter
Principal Contents
i) The objective of financial statements.
ii) Management’s responsibility for financial statements.
iii) The scope of the audit.
iv) The form of any reports or other communications.
v) The fact that due to certain unavoidable factors, the auditors may not be able to detect all material misstatements due to fraud or error.
vi) Requirement of unrestricted access to records etc.
Optional Contents
i) Arrangements regarding the planning of the audit.
ii) Expectation of receiving written representations.
iii) Request for confirmation of terms of engagement.
iv) Description of any other letters or reports the auditor expects to issue to the client.
v) Basis for computation of fees.
Contents to be included under Special Circumstances
i) Arrangements concerning the involvement of other auditors, experts, internal auditors and other client staff.
ii) Arrangements to be made with predecessor auditor, in case of initial audit only.
iii) Restriction on auditor’s liability, if any.
iv) Reference to any further agreements between the auditor and the client.
Note: A specimen engagement letter as given in the AS is given at Annexure-2.
Audit of Components
In case of components (branch, subsidiary or division) the auditor has to decide whether to send a separate engagement letter for the component. It would depend on the following:
i) Who appoints auditor of the component.
ii) Whether a separate audit report is to be issued on the component.
iii) Legal requirements.
iv) The extent of any work performed by other auditors.
v) Degree of ownership by parent.
vi) Degree of independence of the component’s management.
Recurring Audits
Should auditor write an engagement letter every year?
Answer to this question is dependent on the
following factors:
i) If client misunderstands the objective and scope of the audit.
ii) Any revised or special terms of engagement.
iii) A recent change of senior management, board of directors or ownership.
iv) A significant change in nature or size of the client’s business.
v) Legal requirements.
Example of an Audit Engagement Letter
The following letter is for use as a guide in conjunction with the considerations outlined in this ISA and will need to be varied according to individual requirements and circumstances.
To the Board of Directors or the appropriate representative of senior management:
You have requested that we audit the balance sheet of …………..as of …………., and the related statements of income and cash flows for the year then ending. We are pleased to confirm our acceptance and our understanding of this engagement by means of this letter. Our audit will be made with the objective of our expressing an opinion on the financial statements.
We will conduct our audit in accordance with International Standards on Auditing (or relevant national standards or practices). Those ISAs require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation.
Because of the test nature and other inherent limitations of an audit, together with the inherent limitations of any accounting and internal control system, there is an unavoidable risk that even some material misstatements may remain undiscovered.
In addition to our report on the financial statements, we expect to provide you with a separate letter concerning any material weaknesses in accounting and internal control systems, which come to our notice.
We remind you that the responsibility for the preparation of financial statements including adequate disclosure is that of the management of the company. This includes the maintenance of adequate accounting records and internal controls, the selection and application of accounting policies, and the safeguarding of the assets of the company. As part of our audit process, we will request from management written confirmation concerning representations made to us in connection with the audit.
We look forward to full cooperation with your staff and we trust that they will make available to us whatever records, documentation and other information are requested in connection with our audit.
Our fees, which will be billed as work progress, are based on the time required by the individuals assigned to the engagement plus out-of-pocket expenses. Individual hourly rates vary according to the degree of responsibility involved and the experience and skill required.
This letter will be effective for future years unless it is terminated, amended or superseded.
Please sign and return the attached copy of this letter to indicate that it is in accordance with your understanding of the arrangements for our audit of the financial statements.
XYZ & Co.
Acknowledged on behalf of
ABC Company by
(Signed)
Name and Title
Date ________
