Page 342 - CA Inter Audit PARAM

CA Ravi Taori

OR
The agreed terms of the audit engagement shall be recorded in an audit engagement letter or other
suitable form of written agreement. Explain stating its contents.
OR
What is the purpose of a Letter of Engagement? What are the important contents of a Letter of
Engagement?
OR
State the purpose of a ‘Letter of Engagement’.

Mr. J is an articled clerk with a big Chartered Accountants' firm. He is a part of the engagement team
which is conducting the audit of a company for the first time. They are assigned with the work of
preparing the draft audit engagement letter. Mr. J is not sure how to go about with this work. Explain
what Audit Engagement Letter is and what are its contents?
Answer The audit engagement letter is sent by the auditor to his client. It is in the interest of both the auditor and
the client to issue an engagement letter so that the possibility of misunderstanding is reduced to a great
extent. Such a letter includes:

a) The objective and scope of the audit of the financial statements
b) The responsibilities of the auditor
c) The responsibilities of management
d) Identification of the applicable financial reporting framework for the preparation of the financial
statements and
e) Reference to the expected form and content of any reports to be issued by the auditor and a
statement that there may be circumstances in which a report may differ from its expected form and
content.

If law or regulation prescribes in sufficient detail the terms of the audit engagement, the auditor need not
record them in a written agreement, except for the fact that such law or regulation applies and that
management acknowledges and understands its responsibilities.

QNO Revision of Engagement Letter Old Course -- (P16M/N18R/M19M/M21R/SM17)
210.05 Bhaskar CNO SA210.080 New Course – (SM25)
R & Co, a firm of Chartered Accountants have not revised the terms of engagements and obtained
confirmation from the clients for last 5 years despite changes in business and professional environment.
OR
“It is not mandatory to send a new engagement letter in recurring audit, but sometimes it becomes
mandatory to send new letter”. Explain those situations where new engagement letter is to be sent.

OR
A Chartered accountant is conducting audit of a client for last two years. Before proceeding to start audit
for next year, he notices that there is substantial change in management. Besides, client has ventured into
areas of business activity which were not present at time of accepting initial audit engagement. Discuss
responsibility of auditor in this regard in context of SA 210.
Answer ➢ On recurring audits, the auditor shall assess whether circumstances require the terms of the audit
engagement to be revised and whether there is a need to remind the entity of the existing terms
of the audit engagement.
➢ The auditor may decide not to send a new audit engagement letter or other written agreement
each period. However, the following factors may make it appropriate to revise the terms of the
audit engagement or to remind the entity of existing terms:

External Changes:
• A change in legal or regulatory requirements. (New company act / GST)
• A change in the financial reporting framework adopted in the preparation of the
financial statements. (Ind AS)

Change form Management Side:
• A significant change in nature or size of the entity’s business. (E.g., Started
manufacturing along with trading and now turnover has increased 3 times as
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