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.

Outlines

00:00

📜 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.

05:02

📝 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.

10:04

🔍 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.

Keywords

💡ASA 210

ASA 210 refers to the Australian Standard on Auditing 210, which is about agreeing the terms of audit engagements. It is a set of guidelines that dictate how an auditor should interact with the client and what needs to be agreed upon before the audit begins. The video discusses how ASA 210 is in conformity with ISO 210, indicating a standardization of practices across different jurisdictions.

💡Audit Engagement

An audit engagement is a formal agreement between an audit firm and a client that outlines the scope, objectives, and terms of the audit service. The video emphasizes the importance of having a contract, or engagement letter, which is the document that formalizes the audit engagement between the two parties.

💡Engagement Letter

An engagement letter is a specific type of contract that outlines the terms of an audit engagement. It includes details such as the objectives and scope of the audit, the financial reporting framework to be used, and the expected audit report. The script mentions that without this letter, an audit engagement cannot commence.

💡Auditor

The term 'auditor' in the script refers to the individual or firm that will be performing the audit. They are one of the two parties involved in the audit engagement and are responsible for providing an opinion on the financial statements of the client.

💡Audit Client

The audit client is the entity that engages the auditor to perform an audit. They are the other party in the audit engagement and are responsible for providing the necessary information and access to the auditor to complete the audit successfully.

💡Audit Committee

The audit committee is typically the body within a company that is responsible for overseeing the financial reporting process and selecting the external auditor. The script mentions that the audit committee would often be the party signing the engagement letter on behalf of the audit client.

💡Financial Reporting Framework

The financial reporting framework is the set of standards and rules that guide the preparation of financial statements. The script discusses the importance of the auditor and client agreeing on the appropriate financial reporting framework, such as IFRS or US GAAP, before the audit begins.

💡Reasonable Assurance

Reasonable assurance is a term used in auditing to describe the level of confidence an auditor provides on the financial statements. It is not a guarantee but indicates that the auditor has performed their work with a high degree of professional skepticism. The script highlights that auditors provide reasonable assurance, not absolute certainty.

💡Management

In the context of the script, 'management' refers to the individuals or team responsible for the day-to-day operations of a company, including the preparation of financial reports. They are required to acknowledge and understand their responsibilities, such as providing information and access to the auditor.

💡Preconditions for Audit

Preconditions for an audit are the necessary conditions that must be met before an audit can take place. The script explains that these include having an acceptable financial reporting framework and management acknowledging their responsibilities, such as preparing the financial statements.

💡Internal Controls

Internal controls are the policies and procedures put in place by a company to ensure the accuracy and reliability of financial reporting. The script mentions that management is responsible for designing these controls, and auditors must understand them to assess the risk of misstatement.

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

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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

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