603

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Author:
Kshowalter
ID:
51120
Filename:
603
Updated:
2010-11-22 11:48:37
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Establishing Terms Engagement
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Establishing the Terms of the Engagement
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  1. 603.1 After a new or continuing engagement has been accepted, SAS No. 108 (AU 311), Planning and Supervision, requires the auditor to establish an understanding with the client about the services to be performed for each engagement and
    • to document that understanding through a written engagement letter.
    • Although engagement letters have been a common, but optional, practice
    • for many years, SAS No. 108 eliminated the previous alternative of
    • documenting the understanding with the client in the workpapers only.
    • The issuance of an engagement letter may reduce the business risk to the
    • auditor by clarifying the responsibilities of each party and the
    • objectives and limitations of the engagement.
  2. 603.2 SAS No. 108 indicates that the understanding with the client should include
    • (a) the objectives of the
    • engagement, (b) management's responsibilities, (c) the auditor's
    • responsibilities, and (d) limitations of the engagement.
  3. If possible, the understanding should include whether the auditor will make use of a specialist (see section 608) or another auditor's report on the information system and other controls placed in operation by a managing agent. However,
    • determining the need to obtain a service auditor's report involves
    • considerations that may have to wait until the audit planning stage when
    • the auditor has more information about the significance of the service
    • organization's controls to the CIRA's controls. Thus, it may not be
    • possible to reach a definitive understanding about these matters with
    • the client at the pre-engagement stage, and the auditor may need to
    • alert the client of this.
  4. 603.3 The understanding of the engagement terms should also include any other services to be rendered, for example,
    preparation of the tax return.
  5. 603.4 SAS No. 108 states that the
    auditor generally establishes an understanding of the services to be
    performed with the entity's management or, in some cases, with those
    charged with governance, which encompasses the board of directors. The
    authors recommend that the engagement letter be signed by the
    • appropriate CIRA officer (for
    • example, the president) and, if applicable, the managing agent. Because a
    • CIRA's board of directors may be inexperienced in dealing with
    • auditors, the board might expect the managing agent to deal with the
    • auditors and not understand the need for the CIRA's management to also
    • sign an engagement letter. If a CIRA officer does not sign the
    • engagement letter, the auditor should consider reviewing the board
    • minutes to determine whether the governing board has approved the
    • selection of the audit firm.
  6. Documenting the Terms of the Engagement

    603.5 In addition to documenting the required matters mentioned in the preceding paragraphs, an engagement letter can
    • be used to document the fee
    • estimate, expected timing of fieldwork and the report delivery date,
    • expected client clerical assistance during the audit, and arrangements
    • with predecessor auditors, if applicable. Documenting such matters can
    • help prevent misunderstandings. Also, an engagement letter can be an
    • efficient way to provide audit staff with an understanding of the
    • engagement arrangements.
  7. 603.6 As discussed in paragraph 306.18, CIRAs are required to disclose certain information about future major repairs and replacements as
    • supplementary information outside of the basic financial statements. In addition, SOP 93-5, Paragraph 3,
    • requires the auditor to “establish an understanding with the entity
    • regarding the services the accountant will perform with respect to the
    • required supplementary information.” Accordingly, the authors recommend
    • that the engagement letter describe the auditor's responsibilities for
    • that information (for example, they will compile the information and not
    • audit or review it). The authors also recommend that the engagement
    • letter illustrate how the auditors will report on the required
    • supplementary information.
  8. 603.7 HOA-CL-1.1
    presents an example of an engagement letter appropriate for the audit
    of a CIRA that reflects the guidance of SAS No. 108. SQCS No. 7, A Firm's System of Quality Control, indicates
    • that an audit firm should establish policies and procedures requiring
    • the identity and role of the engagement partner to be communicated to
    • management and those charged with governance. The illustrative
    • engagement letter at HOA-CL-1.1 includes a sentence that provides appropriate documentation that the communication has been made.
  9. Early Communication with Those Charged with Governance

    603.8 As discussed beginning at paragraph 812.35,
    auditors are required to communicate certain matters about the audit to
    those charged with governance, including the auditor's responsibilities
    under GAAS and an overview of the planned scope and timing of the
    audit,
    • which should be communicated early in the engagement. HOA-CL-5.1,
    • “Communication with Those Charged with Governance during Planning,”
    • provides a drafting illustration that can be used to communicate with
    • those charged with governance during the planning stage of the audit. If
    • those matters are included in the engagement letter and the engagement
    • letter is sent to those charged with governance, the letter need not be
    • sent.

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