The CONTRACT between the Auditor & the Client | ISA/ASA 210
Summary
TLDRIn this informative video, Dr. Amanda White, a university lecturer in auditing and assurance, delves into the crucial topic of agreeing on the terms of audit engagements as outlined in ASA 210. She emphasizes the necessity of a contract, or engagement letter, between the audit firm and the client to regulate business dealings. Dr. White explains the preconditions for an audit, including the acceptance of a financial reporting framework and management's understanding of its responsibilities. She also details the components of an engagement letter, such as the audit's objectives, scope, and the expected audit report. The video provides insights into the responsibilities of both auditors and management, highlighting the concept of reasonable assurance versus a guarantee. Additionally, she touches on the importance of independence, fee arrangements, and the process for annual general meetings where auditors may be questioned.
Takeaways
- 📜 The video discusses the importance of agreeing on terms in audit engagements, focusing on the Australian Standard ASA 210.
- 🤝 A contract, typically an engagement letter, is necessary between the audit firm and the audit client to regulate business dealings.
- 👥 The parties involved in signing the engagement letter are usually the audit partner and the audit committee or board of the client company.
- 📋 The standard outlines the responsibilities of both the auditor and the client, including providing information, paying fees, and adhering to corporate regulations.
- 🔍 Preconditions for an audit include having an acceptable financial reporting framework and management acknowledging its responsibilities.
- 📈 The audit engagement must clearly define the objectives and scope of the audit, the reporting framework, and the type of audit report expected.
- 🔄 For recurring audits, any changes to the terms must be agreed upon and documented in the contract.
- 💡 The auditor is responsible for identifying risks, obtaining sufficient evidence, and evaluating the client's internal controls and accounting policies.
- 🚫 The auditor is not providing a guarantee but reasonable assurance, which means there is an unavoidable risk that some misstatements may not be detected.
- 💼 Management is responsible for preparing the financial report, establishing internal controls, and providing the auditor with unrestricted access to information and personnel.
- 💵 Fee arrangements for the audit are typically a fixed fee with potential contingencies for unusual findings.
Q & A
What is the main focus of the video script?
-The main focus of the video script is explaining the importance of agreeing on terms for audit engagements, specifically discussing the role of engagement letters in auditing.
Who typically signs the audit contract?
-The audit contract, or engagement letter, is typically signed by the audit partner and someone on behalf of the company, often a member of the audit committee.
Why is a contract necessary between the audit firm and the audit client?
-A contract is necessary to regulate business dealings and define the responsibilities of both parties involved in the audit engagement.
What is the term used for the contract between the auditor and the audit client?
-The contract between the auditor and the audit client is referred to as an engagement letter.
What are the preconditions for an audit according to the script?
-The preconditions for an audit include having an acceptable financial reporting framework and management acknowledging and understanding its responsibilities.
What does management need to understand as part of their responsibilities?
-Management needs to understand their responsibilities for preparing the financial report, designing internal controls, providing access to information, and allowing unrestricted access to people within the firm.
What is the scope of the standard ASA 210?
-The scope of the standard ASA 210 is about the responsibilities in the terms of the audit engagement with management and potentially those charged with governance.
What is the difference between reasonable assurance and a guarantee in the context of an audit?
-Reasonable assurance is a high level of assurance but not a guarantee. It means that while the audit is planned and performed to detect material misstatements, there is an unavoidable risk that some misstatements may not be detected.
What are the auditor's responsibilities as outlined in the script?
-The auditor's responsibilities include identifying risks of misstatement, obtaining sufficient appropriate evidence to provide an opinion, understanding the client's internal controls, and communicating any deficiencies or problems in their policies and procedures.
What additional information might be included in the engagement letter for audits in Australia?
-In Australia, the engagement letter might include additional requirements from the Corporations Act regarding auditor independence.
What is the purpose of the engagement letter?
-The purpose of the engagement letter is to confirm the terms of the audit engagement, including the objectives, scope, reporting framework, and the type of audit report expected.
Outlines
📜 Introduction to Audit Engagements
Dr. Amanda White introduces the topic of ASA 210, focusing on the agreement of terms for audit engagements. She explains the importance of having a contract between the audit firm and the audit client to regulate business dealings. The parties involved are typically the audit partner and the audit committee or board. The contract is known as an engagement letter. The standard ASA 210 is in line with ISO 210, with some sections specific to Australia. The scope of the standard covers responsibilities in audit engagements with management and governance. Definitions are provided for terms like 'management', often referring to the Audit Committee or the board in the case of publicly listed firms.
📝 Preconditions and Contract Terms
The video script discusses the preconditions for an audit, which are necessary before an audit can commence. These include the financial reporting framework's acceptability and management's understanding of their responsibilities. Management is responsible for preparing financial reports, designing internal controls, and providing the auditor with access to information and people within the firm. Limitations, such as restricted access to information, must be disclosed before signing the contract. The contract should outline the audit's objectives and scope, the reporting framework, and the type of audit report expected. For recurring audits, any changes to these terms must be agreed upon and updated in the contract.
🔍 Auditor and Management Responsibilities
Dr. White outlines the responsibilities of auditors, which include identifying risks of misstatement, obtaining sufficient evidence, and evaluating accounting policies. Auditors must also communicate any deficiencies in internal controls and assess the overall financial report. There is an unavoidable risk that some misstatements may not be detected despite a properly planned and performed audit. Management's responsibilities encompass preparing the financial report, establishing internal controls, and providing access to information and firm personnel. The contract should specify the audit period, the company being audited, and the expected components of the financial statements. It also clarifies that the audit provides reasonable assurance, not a guarantee, and that the auditor will issue an opinion on the financial statements. The script also mentions additional considerations for audits, such as fee arrangements and specific reporting requirements, including those mandated by the Corporations Act in Australia.
Mindmap
Keywords
💡ASA 210
💡Audit Engagement
💡Engagement Letter
💡Auditor
💡Audit Client
💡Audit Committee
💡Financial Reporting Framework
💡Reasonable Assurance
💡Management
💡Preconditions for Audit
💡Internal Controls
Highlights
Introduction to the importance of agreeing terms of audit engagements
Dr. Amanda White's introduction as a university lecturer in auditing and assurance
Explanation of the necessity of a contract between audit firm and client
Identification of the two parties involved in the audit contract: the audit firm and the audit client
Clarification that engagement letters are the contracts between the auditor and the client
Discussion on the legal enforceability of the components within the engagement letter
Conformity of ASA 210 with ISO 210 and the specific sections applicable to Australia
Scope of the standard covering responsibilities between management and auditors
Definition of management in the context of publicly listed firms and the audit committee
Preconditions for the audit including the financial reporting framework and management's responsibilities
Management's acknowledgment of their responsibilities under corporation regulations
The auditor's responsibilities to identify risks and obtain sufficient evidence
The auditor's obligation to communicate deficiencies in internal controls
Management's responsibilities for preparing financial reports and providing access to information
The auditor's role in evaluating accounting policies and the going concern basis
The auditor's disclaimer about the unavoidable risk of not detecting misstatements
Sample engagement letter contents and structure
Explanation of reasonable assurance versus guarantee in the audit process
Details on fee arrangements and audit report requirements
Australian specific requirements for auditor independence under the Corporations Act
Information about annual general meetings and auditor interactions
Invitation for questions and engagement from viewers
Transcripts
[Music]
hi and welcome to the video on ice at
ASA to 10 which is agreeing the terms of
ordered engagements now if this is your
first time at the channel welcome my
name is dr. Amanda white I am a
university lecturer in auditing and
assurance at the University of
Technology Sydney and on this channel
you'll find heaps of free ordering
information about standards about
concepts even for laches so click
subscribe and have a browse around the
channel now today what we're getting
into is a essay to 10 which is agreeing
the terms of audit engagements now this
is really important because in any sort
of business arrangement you should have
a contract between the two parties all
right where business is going on so
there needs to be a contract between
those two parties who are those two
parties well in our case those two
parties are the audit firm so the
auditor which is typically the audit
partner and we've got our audit client
now in terms of who would be signing
that that would typically be the audit
committee so between these two parties
we need to have a contract between both
of them to regulate those sorts of
business dealings so we have our
contract alright and the auditor and the
audit client need to sign and that will
govern both of their behavior so our
contract when it comes to auditors are
called
something very very specific and they're
actually called engagement letters that
might seem like a strange name for a
contract but our engagement letters
our terms of our contracts between our
two parties so let's get into the actual
step you the the basic stuff and here
we'll go through and remember that
there's the requirements so the
requirements are always going to be the
legally enforceable components and then
later on down here you'll see the
explanatory material in these videos I
focus on going over the requirement
information about compilation changes to
the standard over time and if we look
here ASA 210 which is the in the
Australian standard that my students
will use here in Australia we're clearly
in conformity with ISO 210 which is the
same number the same name now there are
some sections that have a specific a us
that apply only to Australia and not in
international jurisdictions so let's
start with the scope of the standard so
the scope of the standard always tells
us about well what is this auditing
standard about so it's very clear it's
the responsibilities in the terms of the
audit engagement with management and
potentially those charged with
governance so remember that contract law
says both parties will have
responsibilities of things to do might
be to provide information or to pay
money and this standard covers that now
if we're going to our definition
sometimes if there's a new term you
don't understand definitions is always
the place to look at there really is
only one that we're really going to be
looking at and that reference to
management usually refers to management
and those charged with governance so
from our perspective for publicly listed
firms that's usually going to represent
the Audit Committee but if there's no
Audit Committee it might represent the
board so let's start with our
requirements and these are our legally
enforceable components all right so
there are some things about the
preconditions for the audit now
preconditions for the audit are things
that we have to have before we can
actually give an audit to the client so
there's a couple of different things
what is the financial reporting
framework and is it acceptable now
you'll see here there's some references
to some extra explanatory material so
are they working with a financial
reporting framework that we think is
appropriate the second thing is that
management acknowledges and understands
its responsibilities so that means that
management have to know what they are
supposed to do under our corporation's
regulations so for example they're
responsible for preparing the financial
report the auditor can't say what goes
into the report we can provide
suggestions but management other ones
have to decide exactly what goes in
management are also responsible for
designing internal controls so policies
and procedures and the order has to they
have to provide the auditor management
has to provide auditor access to
information anything else we might
request and unrestricted access to
people within the firm so that we can
ask our questions so these are all the
things that management have to be sure
that they understand is their
responsibility now there are some
limitations for example if particular
access to information you know might not
be available you will actually disclose
that before you even sign the contract
so before the auditor can actually do
any work plan anything we have to have
the contract process so what sort of
other things need to go into our
contract so this agreement on the terms
is really what are the things that are
going to go into my contract so there
are some pretty specific basics the
objective and scope oops we're all sort
of in there
so what does the audit all about
objectives and scope we clearly list out
what the auditor should do and what
management should do what's the
reporting framework that we're using are
we using
if hrus all right or if we're auditing a
u.s. parent do we have to worry about US
GAAP so we need to know what that
financial reporting framework is and
then the final thing reports so what
sort of audit report are they expecting
is there something under international
reporting we need to be aware of so
those are the main terms of our audit
engagement and on recurring audits so
this is usually the first time you do an
audit a recurring order it is an audit
that you do the second or third time so
they have to figure out do we need to
change anything all right
so if there is a change then there needs
to be some agreements in the contract
too that there are some extra
considerations if you're auditing for
example a US company you may have extra
requirements by law but realistically
the key parts were they really are
paragraphs now in the explanatory
material you'll see there's lots of
things here about preconditions and
about scope would I show you in this
short summary of a SI 210 is a key
feature from appendix one all right and
this is a sample a common sample of a
contractor we can't start the audit
engagement without this so common things
and most audit firms will be following
exactly the same contract starts with
things like the met to the
representative of management or those
charged with governance and there are
headings so these here are actually
little headings used in the contract all
right so that's why they're in those
little brackets but it says okay
we're having the audit we say the
financial period we'll say which company
what we're expecting to look at income
statement cash flows notes to the
accounts and we're confirming our
acceptance by means of this letter so
this is the contract
I'm also very clear is that we're
looking at reasonable assurance we're
not giving a guarantee in doing this
audit and we're looking to be free from
material misstatement whether due to
fraud or error and we're going to issue
our opinion now a key thing here to make
my highlighter a little smaller is that
it's not a guarantee so reasonable
assurance is a high level of assurance
it's not a guarantee that we're always
going to detect misstatements so that's
a key thing to remember especially with
definitely lots of spotlights on
auditors now I mentioned that the
auditors have responsibilities so that
here are some of the responsibilities
identify risk of misstatement obtain
ordered evidence to provide our opinion
all right
they need to understand the internal
controls of the client and then if we
zoom in on the next page we're also
required to communicate any deficiencies
or problems in their policies and
procedures we have to evaluate
accounting policies we have to conclude
where the management's use of the going
concern basis is appropriate and I've
got another video on going concern I'll
link in and then evaluate the overall
financial report now there is a key
disclaimer here there's an unavoidable
risk that summary statements may not be
detected even though the audit is
planned and performed accordingly and
that's because our audit is not a
guarantee that comes back to that
reasonable assurance so what a
management have to be responsible for
all right so they have responsibility
for preparing the financial report
putting together internal controls
access to information any additional
information that we might request and
unrestricted access to people within the
firm now if you think that the client
can't provide some of these whoops um if
you think your client can't provide some
of these then I would be really
concerned about whether you would want
to take this audit and forward when we
get to the very last component there's
some other things about the date of the
financial report so information when
that's going to be provided any
information they agree not to provide
and then when you scroll a bit further
down important information about the
money fee arrangements how much they
agree most audits are usually some form
of fixed fee arrangement with some
contingencies in case you find something
unusual but there is certain
requirements for fees and there might be
some specifics oops wrong pen they're
about what sort of audit report we might
have to give now in Australia we also
have some specific extra requirements
and those are from the Corporations Act
in regards to independence so here we
say that we're beating the independence
requirements of the Corporations Act and
then the very last final page is some
information about annual general
meetings in which people can ask the
questions of the auditor and how that we
go about doing that now when we go down
here you might notice that there are two
places to sign so we know that the audit
partner has to sign and they have to
sign with their name and then somebody
on behalf of the company as I mentioned
before that's quite often someone from
the Audit Committee if you have any
questions about audit engagement letters
then please let me know in the comments
otherwise
click to subscribe and I'll see you in
the next video
[Music]
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