The CONTRACT between the Auditor & the Client | ISA/ASA 210

Summary

In 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.