## Agreeing the Terms of Audit Engagements (SA-210)

### Objective

The auditor may accept or continue an audit engagement only when:

1. Preconditions for an audit are present; AND

2. There is a common understanding (auditor ↔ management/TCWG) of the terms of engagement

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### Preconditions for an Audit

#	Precondition
1	The Financial Reporting Framework (FRF) used is acceptable
2	Management acknowledges its responsibilities

Management's responsibilities include:

Preparing FS as per the FRF
Maintaining ICS to ensure FS are free from Material Misstatement (MM)
Providing the auditor with:
Access to ALL information relevant to FS preparation
Additional information the auditor may request
Unrestricted access to persons within the entity

If preconditions are NOT present:

Discuss with management
Do NOT accept the engagement

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### Engagement Letter (EL)

Meaning: Written record of agreed terms between auditor and management/TCWG. Sent by the auditor to the client.

Mandatory Content:

1. Objective and scope of the audit

2. Responsibilities of the auditor

3. Responsibilities of management

4. Identification of the applicable FRF

5. Expected form and content of reports to be issued

Why issue an EL? Reduces the possibility of misunderstanding between auditor and client.

Legal exception: If law already prescribes engagement terms in sufficient detail, a written agreement may not be needed.

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### When is a New EL Required?

A new EL is NOT needed every year unless:

#	Trigger
1	Change in senior management
2	Change in legal requirement
3	Change in ownership
4	Change in nature or size of business
5	Change in terms of engagement
6	Change in FRF
7	Entity misunderstands objective & scope
8	Change in other reporting requirements

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### Change in Terms of Engagement

Reason for Change	Auditor's Response
Change in circumstances	May accept — record new terms in EL
Misunderstanding as to nature of engagement	May accept — record new terms in EL
Scope restriction (by management or circumstances)	Seek reasonable justification

If scope restriction is unjustified:

Do NOT accept the change
Options: (a) Withdraw, OR (b) Issue Modified Opinion (management may then ask to change engagement type)

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### Change in Nature of Engagement

Management may ask to downgrade to:

Review (limited assurance)
Related Services (no assurance — agreed-upon procedures, compilation)

Auditor may accept if: The change is reasonable and legal/contractual implications have been considered.

When providing the new review/RS report, the auditor must NOT:

Refer to the original audit engagement
Refer to audit procedures performed (unless used by the practitioner in the new engagement)

Worked example

### Example 1

ABC Ltd.'s outgoing MD is replaced by a new CEO. This triggers a 'Change in Senior Management' — the auditor must issue a new Engagement Letter before continuing the audit to ensure the new management understands the auditor's role, responsibilities, and scope, and to re-confirm management's acknowledgement of its own responsibilities.

### Example 2

Mid-audit, management restricts the auditor's access to records of a subsidiary, citing commercial sensitivity (scope restriction). The auditor seeks justification. If management cannot provide a reasonable ground, the auditor has two options: (a) withdraw from the engagement, or (b) continue and issue a modified (qualified or disclaimer of) opinion addressing the limitation of scope.

⚠️ Common exam mistakes

Thinking an Engagement Letter must be reissued every year — it is NOT required annually; only the eight specific triggers necessitate a new EL.
Confusing preconditions (whether to accept the audit) with engagement letter content (the terms of an accepted audit) — these are sequential: preconditions checked first, EL issued after.
Assuming a scope restriction always requires withdrawal — the auditor first evaluates whether the justification is reasonable; withdrawal is only one of two options if the justification fails.
Forgetting that when the nature of engagement changes (audit → review/RS), the new report must NOT reference the original audit work — treating them as a continuum violates SA-210.

Bare-Act text Objective · SA 210 — Agreeing the Terms of Audit Engagements (ICAI) · click to expand

The objective of the auditor is to accept or continue an audit engagement only when the basis upon which it is to be performed has been agreed, through: (a) Establishing whether the preconditions for an audit are present; and (b) Confirming that there is a common understanding between the auditor and management and TCWG of the terms of the audit engagement.

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