Terms of Engagement (SLAUS 2)
The purpose of this Sri Lanka Auditing Standard (SLAuS) is to establish standards and provide guidance on agreeing the terms of the engagement with the client.
The auditor & the client should agree on the terms of the engagement.
The agreed terms would need to be recorded in an audit engagement letter or other suitable form of contract.
It is in the interest of both client and auditor that the auditor sends an engagement letter, preferably before the commencement of the engagement, to help in avoiding misunderstandings with respect to the engagement. The engagement letter documents and confirms the auditor's acceptance of the appointment, the objective and scope of the audit, the extent of the auditor's responsibilities to the client and the form of any reports.
Advantages of having an Engagement Letter
v It avoids misunderstanding
v It documents audit evidence
v It clearly specifies the objective & the scope of the audit
v It help the auditor in carrying out legal procedures
v It confirms auditors acceptance of the engagement
Form & content of an Engagement Letter
1) Principal Contents
The form and content of audit engagement letters may vary for each client, but they would generally include reference to:
v The objective of the audit of financial statements.
v Management's responsibility for the financial statements.
v The scope of the audit, including reference to applicable legislation,
regulations, or pronouncements of the Institute of Chartered Accountants
of Sri Lanka
v The form of any reports or other communication of results of the
engagement.
v The fact that 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 misstatement may remain undiscovered.
v Unrestricted access to whatever records, documentation and other information are requested in connection with the audit.
2) The Auditor may contain
The auditor may also wish to include in the letter:
v Arrangements regarding the planning of the audit.
v Expectation of receiving from management written confirmation concerning representations made in connection with the audit.
v Request for the client to confirm the terms of the engagement by acknowledging receipt of the engagement letter.
v Description of any other letters or reports the auditor expects to issue to the client.
v Basis on which fees are computed and any billing arrangements
v Arrangements regarding the planning of the audit.
v Expectation of receiving from management written confirmation concerning representations made in connection with the audit.
v Request for the client to confirm the terms of the engagement by acknowledging receipt of the engagement letter.
v Description of any other letters or reports the auditor expects to issue to the client.
v Basis on which fees are computed and any billing arrangements
3) When relevant, the following points could also be made:
v Arrangements concerning the involvement of other auditors and experts in some aspects of the audit.
v Arrangements concerning the involvement of internal auditors and other client staff.
v Arrangements to be made with the predecessor auditor, if any, in the case of an initial audit.
v Any restriction of the auditor's liability when such possibility exists.
v A reference to any further agreements between the auditor and the client
Audits of Components
When the auditor of a parent entity is also the auditor of its subsidiary, branch or division (component), the factors that influence the decision whether to send a separate engagement letter to the component include:
v Who appoints the auditor of the component.
v Whether a separate audit report is to be issued on the component.
v Legal requirements.
v The extent of any work performed by other auditors.
v Degree of ownership by parent.
v Degree of independence of the component's management.
Recurring Audits
The auditor should consider whether circumstances require the terms of the engagement to be revised and whether there is a need to remind the client of the existing terms of the engagement.
The auditor may decide not to send a new engagement letter each period. However,
The following factors may make it appropriate to send a new letter:
v Any indication that the client misunderstands the objective and scope of the audit.
v Any revised or special terms of the engagement.
v A recent change of senior management, board of directors or ownership.
v A significant change in nature or size of the client's business.
v Legal requirements.
Questions & Answers
1) What is the purpose of this Sri Lanka Auditing Standard (SLAuS 2)?
The purpose of this Sri Lanka Auditing Standard (SLAuS 2) is to establish standards and provide guidance on agreeing the terms of the engagement with the client.
2) What are the Advantages of having an Engagement Letter?
v It avoids misunderstanding
v It documents audit evidence
v It clearly specifies the objective & the scope of the audit
v It help the auditor in carrying out legal procedures
v It confirms auditors acceptance of the engagement
3) What are the three contents include in engagement letter?
· Principal Contents
I. The objective of the audit
II. Management's responsibility
III. The scope of the audit
· The Auditor may contain
I.Arrangements regarding the planning of the audit.
II.Expectation of receiving from management written confirmation concerning representations made in connection with the audit.
III.Request for the client to confirm the terms of the engagement by acknowledging receipt of the engagement letter.
IV.Description of any other letters or reports the auditor expects to issue to the client.
V.Basis on which fees are computed and any billing arrangements
· When relevant, the following points could also be made
I. Arrangements concerning the involvement of other auditors and experts in some aspects of the audit.
II. Arrangements concerning the involvement of internal auditors and other client staff.
III. Arrangements to be made with the predecessor auditor, if any, in the case of an initial audit.
IV. Any restriction of the auditor's liability when such possibility exists.
V. A reference to any further agreements between the auditor and the client
4) What is the meaning of Audits of Components & what are the factors that influence the decision whether to send a separate engagement letter to the component?
The meaning of Audits of Components is the auditor of a parent entity is also the auditor of its subsidiary, branch or division (component).
Factors that influence the decision whether to send a separate engagement letter
v Who appoints the auditor of the component.
v Whether a separate audit report is to be issued on the component.
v Legal requirements.
v The extent of any work performed by other auditors.
v Degree of ownership by parent.
Degree of independence of the component's management
5) What is the meaning of Recurring Audits?
The Auditor may decide audit for long time. It means that the auditor may decide not to send a new engagement letter each period.
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