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What Terms have to be agreed upon between an Auditor and their Client?


It is crucial to the relationship that the auditor and the client agree on the terms of engagement before beginning their work together.


In the absence of such terms, there is no clear understanding of responsibilities, and the absence of clear terms of engagement can generate a lot of issues both during the engagement and after it has ended.


ISA 210 Agreeing the Terms of Audit Engagements deals with the auditor's responsibilities in agreeing on the terms of the audit engagement with management and, where appropriate, those charged with governance.


Preconditions for an Audit

To establish whether the preconditions for an audit are present, the auditor shall:

  1. Determine whether the financial reporting framework to be applied in the preparation of the financial statements is acceptable; and

  2. Obtain the agreement of management that it acknowledges and understands its responsibility

  • For the preparation and fair presentation of the financial statements in accordance with an applicable financial reporting framework;

  • For such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.; and

  • To provide the auditor with the following:

  • Access to all information that management is aware of that is relevant to preparing the financial statements, such as records, documentation and other matters;

  • Additional information that the auditor may request from management for the purpose of the audit; and

  • Unrestricted access to persons within the entity from whom the auditor determines it necessary to obtain audit evidence.

Only if the above criteria can be agreed upon can the auditor accept or continue an audit engagement.


If the preconditions for an audit are not present, the auditor shall discuss the matter with management.

Suppose management or those in charge of governance put a limit on the scope of the auditor's work in a proposed audit engagement, and the auditor thinks that the limit will cause the auditor not to give an opinion on the financial statements. In that case, the auditor shall not accept such a limited engagement as an audit engagement unless required by law or regulation.


In many cases, the preconditions for an audit can be met, and then the auditor must agree on the terms of the engagement with management and, if applicable, those in charge of governance.


Agreement on Audit Engagement Terms

This deal is usually spelt out in a letter of engagement, which will usually include (subject to different jurisdictions' requirements):

  1. The objective and scope of the audit of the financial statements;

  2. The responsibilities of the auditor;

  3. The responsibilities of management;

  4. Identification of the applicable financial reporting framework for the preparation of the financial statements (for example, IFRS, MFRS, MPERS);

  5. Confirmation that some material misstatement may not be detected;

  6. The basis on which fees are calculated;

  7. Reference to the expected form and content of any reports to be issued by the auditor; and

  8. A statement that there may be circumstances in which a report may differ from its expected form and content;

An engagement letter is important for the auditor and entity before the engagement begins.

This ensures there are no misunderstandings about the audit or management roles, those in charge of governance, and the auditor.


Many professional bodies also require member firms to have an up-to-date engagement letter.


This protects the auditor's interests and ensures everyone knows their roles in the engagement.


Example of an Audit Engagement Letter

Since different countries have varying requirements, the format and content of an audit engagement letter may vary. Because of this, the following illustrative engagement letters will be used as a guide in conjunction with considerations outlined in ISA 210 and should be varied according to individual requirements and circumstances.


MIA_ Audit and Assurance Illustrative Guide AAIG 1 Letter of Engagement
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