## Preconditions for Audit and Management Responsibilities (SA 210)

### The Auditor's Objective

The auditor should 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 a common understanding between auditor and management of the terms of the engagement

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### Key Precondition: Management's Acknowledgment

One of the preconditions for audit is obtaining the agreement of management that it acknowledges and understands its responsibility for:

1. Preparation of financial statements in accordance with the applicable financial reporting framework

2. Internal control — designing, implementing, and maintaining such internal control as is necessary to enable preparation of financial statements free from material misstatement

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### Who is Responsible for What?

Responsibility	Party
Design, implement, maintain internal control	Management
Prepare financial statements	Management
Express opinion on financial statements	Auditor
Detect ALL misstatements	Neither — auditor provides reasonable assurance, not a guarantee

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### Consequence of Non-Acknowledgment

If management refuses to provide the agreement acknowledging its responsibilities:

The auditor shall not accept the proposed audit engagement
Exception: Unless required by law or regulation to do so

Worked example

### Example 1

Scenario (RTP May 24): CA X insisted that management of TDK Industries (a partnership firm) acknowledge its responsibility for having proper internal control in place to ensure financial statements are free from material misstatements. Management argued that detecting material misstatements is the auditor's duty and such insistence is uncalled for. Whose view is correct? What should CA X do if management refuses?

Answer: CA X's view is correct. As per SA 210, one of the preconditions for audit is that management acknowledges its responsibility for internal controls necessary to enable preparation of statements free from material misstatements. Designing, implementing, and maintaining internal control is management's responsibility — not the auditor's.

The auditor's role is to express an opinion on the financial statements, not to bear primary responsibility for their preparation or for all internal controls. If management refuses to provide this acknowledgment, CA X shall not accept the proposed audit engagement (unless required by law or regulation).

⚠️ Common exam mistakes

Confusing auditor's responsibility (express opinion on statements) with management's responsibility (prepare statements, maintain internal control)
Thinking the auditor is solely responsible for detecting all material misstatements — auditor provides reasonable assurance, not a guarantee of detecting everything
Not knowing the consequence of management refusing to acknowledge its responsibilities — auditor must decline the engagement
Treating management's acknowledgment as optional or a formality — it is a mandatory precondition for accepting the engagement

Bare-Act text SA 210 · SA 210 – Agreeing the Terms of Audit Engagements · 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, where appropriate, those charged with governance of the terms of the audit engagement.

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