Before accepting or continuing an audit engagement, the auditor must complete three preliminary steps under SA 300.
### (i) Continuance / Acceptance Procedures
The firm must obtain vital information about the client and evaluate:
Integrity of the client — Are the promoters/management honest?
Competence of the engagement team — Does the firm have the right people?
Compliance with ethical requirements — Can the firm remain independent?
### (ii) Establishing Understanding of Terms of Engagement
An Engagement Letter must be signed by both auditor and client.
Purpose: to avoid misunderstanding about scope, responsibilities, and fees.
Governed by SA 210 (Agreeing the Terms of Audit Engagements).
### (iii) Evaluating Compliance with Ethical Requirements (Including Independence)
The Engagement Partner must form a formal conclusion on whether the firm complies with independence requirements. Steps involved:
Step
Action
a
Obtain relevant info from client; identify and evaluate circumstances/relationships that create threats to independence
b
Evaluate identified breaches of the firm's independence policies and procedures; determine if they create a threat
c
Take appropriate action: eliminate threats, apply safeguards to reduce them to an acceptable level, or withdraw from the engagement if necessary
> Note: The Engagement Partner must promptly report to the firm any inability to resolve a matter, for appropriate action.
Worked example
### Example 1
Scenario: You are proposed as auditor of Reliance Ltd. How will you proceed?
Answer: Before accepting, perform Preliminary Engagement Activities:
1. Evaluate integrity of Reliance's management and promoters.
2. Assess whether your firm has a competent engagement team with relevant industry knowledge.
3. Check compliance with ethical requirements — identify any relationships or financial interests that threaten independence.
4. If threats exist, apply safeguards (e.g., assign a different partner) or, if threats cannot be reduced to an acceptable level, decline the engagement.
5. Once satisfied, issue and sign an Engagement Letter (per SA 210) clearly stating scope, responsibilities, and fees.
⚠️ Common exam mistakes
Thinking acceptance is complete once the client agrees — ethical compliance and independence checks must come first.
Forgetting that the Engagement Partner (not just any team member) must formally conclude on independence compliance.
Overlooking that withdrawal from an engagement is a valid and sometimes required outcome when independence threats cannot be mitigated.
Conflating SA 300 (planning) with SA 210 (engagement letter) — the engagement letter step falls under preliminary activities governed by SA 210, referenced within SA 300.
Bare-Act text Preliminary Engagement Activities · SA 300 – Planning an Audit of Financial Statements (ICAI) · click to expand
The engagement partner shall form a conclusion on compliance with independence requirements that apply to the audit engagement. In doing so, the engagement partner shall: (a) obtain relevant information from the firm and, where applicable, network firms, to identify and evaluate circumstances and relationships that create threats to independence; (b) evaluate information on identified breaches, if any, of the firm's independence policies and procedures to determine whether they create a threat to independence for the audit engagement; and (c) take appropriate action to eliminate such threats or reduce them to an acceptable level by applying safeguards, or, if considered appropriate, to withdraw from the audit engagement, where withdrawal is possible under applicable law or regulation.