# SA 210: Agreeing to the Terms of Audit Engagements
## The Engagement Process — Flow
```
Client (X Ltd) → Inquiry (1) → Auditor (ABC & Co.)
Auditor → Proposal (2) → Client
Client → Letter of Appointment (5) → Auditor
Auditor → Terms of Engagement (3) → Client
Letter of Engagement (4)
```
## A. Preconditions Before Accepting the Audit
The auditor must:
1. Determine whether the Financial Reporting Framework (FRF) is acceptable
2. Obtain management's agreement on their responsibilities:
- Preparation of financial statements
- Maintaining internal control (IC)
- Providing the auditor:
- (a) Access to information
- (b) Access to additional information on request
- (c) Unrestricted access to persons within the entity
> Rule: If preconditions are absent → Do NOT accept the audit engagement.
## B. Contents of Engagement Letter — Mnemonic: FORAM
| Letter | Content |
|---|---|
| F | Identification of the applicable Financial Reporting Framework |
| O | Objective and scope of the audit |
| R | Reference to expected form and content of reports to be issued (including note that reports may differ from expected form) |
| A | Responsibilities of the Auditor |
| M | Responsibilities of Management |
> Exception: If law or regulation prescribes the terms in sufficient detail, no written agreement is needed — except to note that such law applies and management acknowledges its responsibilities.
## C. Limitation on Scope of Audit (LOSA) — Three Sources
| Source | Example |
|---|---|
| Circumstances beyond entity's control | Natural disaster destroying records |
| Nature and timing of audit procedures | Inventory count impossible after year-end |
| Imposed by management | Management refuses access to certain documents |
## D. LOSA Imposed at the Beginning (Before Accepting)
```
Management / TCWG imposes LOSA
↓
Auditor evaluates possible effects
↓
If LOSA will result in a disclaimer of opinion
↓
DO NOT ACCEPT the appointment
(unless required by law or regulation to do so)
```
## E. Change in Terms of Engagement — During the Audit
```
Management requests a change in Terms of Engagement (TOE)
↓
Auditor inquires about the reasons
↓
┌─────────────────────────┬────────────────────────────────────┐
│ VALID (reasonable │ INVALID │
│ justification) │ │
│ ↓ │ ↓ │
│ Accept, but only │ Do NOT accept │
│ IN WRITING │ If management still won't allow │
│ │ original engagement to continue │
│ │ ↓ │
│ │ ROSA (Restriction on Scope) │
│ │ ↓ │
│ │ WITHDRAW │
│ │ (after fulfilling legal │
│ │ obligations) │
└─────────────────────────┴────────────────────────────────────┘
```
### When is justification reasonable?
- Change in circumstances affecting the need for the service
- Misunderstanding as to the nature of the audit originally requested
- Restriction on the scope of the engagement
- Change in the entity's requirements
### When is it NOT reasonable?
- When the change relates to information that is incorrect, incomplete, or otherwise unsatisfactory
- Classic example: Auditor cannot obtain SAAE regarding receivables → client asks to change to a review engagement to avoid a qualified/disclaimer opinion → NOT acceptable
### Before agreeing to a lower-assurance engagement:
- Assess legal or contractual implications of the change
- The new report must NOT reference the original audit engagement or procedures (to avoid confusing readers)
- Exception: If changed to agreed-upon procedures, referencing procedures is normal and expected
### If auditor cannot agree and is not permitted to continue:
(a) Withdraw from the engagement (where possible under law/regulation)
(b) Determine reporting obligations — whether to report circumstances to TCWG, owners, or regulators
## F. Recurring Audit — When to Issue a Fresh Engagement Letter?
Mnemonic: MORONS
| Letter | Circumstance |
|---|---|
| M | Entity Misunderstands the objective and scope |
| O | Significant change in Ownership |
| R | Change in legal or Regulatory requirement |
| O | Change in Other reporting requirements |
| N | Change in Nature and size of the entity's business |
| S | Recent change of Senior management |