Page 202 - CA Final Audit Titanium Full Book. (With Cover Pages)

CA Ravi Taori
(CNO SRE 2410.040) Agreeing the Terms of the Engagement
Agreeing on Engagement Terms: The auditor and the client should agree on the terms of the engagement. The
agreed terms of the engagement are ordinarily recorded in an engagement letter.
Purpose: Such communication helps to avoid misunderstandings regarding the nature of the engagement and,
in particular, the objective and scope of the review, management’s responsibilities, the extent of the auditor’s
responsibilities, the assurance obtained, and the nature and form of the report.
Understanding the Entity and its Environment including its Internal Control
Understanding the Entity and its Environment: The auditor should have an understanding of the entity and
its environment, including its internal control, as it relates to the preparation of both annual and interim
financial information, sufficient to plan and conduct the engagement.
Objective of Understanding: Identify the types of potential material misstatement and consider the likelihood
of their occurrence. Select the inquiries, analytical and other review procedures that will provide the auditor with
a basis for reporting whether anything has come to the auditor’s attention that causes the auditor to believe that
the interim financial information is not prepared, in all material respects, in accordance with the applicable
financial reporting framework.
Auditor’s Previous Understanding: The auditor who has audited the entity’s financial statements for one or
more annual periods has obtained an understanding of the entity and its environment, including its internal
control, as it relates to the preparation of annual financial information that was sufficient to conduct the audit.
Updating Understanding for Interim Review: In planning a review of interim financial information, the
auditor updates this understanding. The auditor also obtains a sufficient understanding of internal control as it
relates to the preparation of interim financial information as it may differ from internal control as it relates to
annual financial information.
Updating Understanding.
1. Review of Past Records and Information:
- Reviewing documentation from the preceding year's audit and reviews of prior interim period(s) of the
current year and corresponding interim period(s) of the prior year
- Reading the latest annual and prior period interim financial data.
- Considering significant risks from the prior year's audit.
- Assessing corrected and uncorrected misstatements from the prior year.
- Evaluating continuing significant financial accounting matters.

2. Assessment and Consideration of Current Year's Information:
- Performing audit procedures for the current year's financial statements.
- Assessing materiality for interim financial information.
- Evaluating results of internal audits and management's subsequent actions.

3. Inquiries and Communication with Management:
- Inquiring about management's assessment of fraud risks.
- Discussing changes in the entity's business activities.
- Discussing significant changes in internal control and their impact on interim financial information
preparation.
- Understanding the process and reliability of the interim financial information preparation.
Not yet performed an audit: In order to plan and conduct a review of interim financial information, a recently
appointed auditor, who has not yet performed an audit of the annual financial statements in accordance with
SAs, should obtain an understanding of the entity and its environment, including of its internal control, as it
relates to the preparation of both annual and interim financial information.

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