BSA 3105 PSA 210 lecture notes- GROUP 5.pptx

PSA 210

1. Standards to read PSA 210 REDRAFTED - AGREEING THE TERMS OF AUDIT ENGAGEMENT Whatever you do, do it well. – Walt Disney Quote of the Day Today is a good day Today's Agenda PSA 210 Engagement Letter Application and Other Materials

2. Agreeing the terms of Audit Engagement PSA 210 Redrafted

3. SCOPE OF THIS PSA deals with the auditor’s responsibilities in agreeing the terms of the audit engagement with management and, where appropriate, those charged with governance. This includes establishing that certain preconditions for an audit, responsibility for which rests with management and, where appropriate, those charged with governance, are present.

4. Objectives

5. Objectives THE OBJECTIVE OF THE AUDITOR IS TO ACCEPT O R CONTIN U E A N AU D IT ENGAGEMENT ONLY WHEN THE BASIS UPON WHICH IT IS TO BE PERFORMED HAS BEEN AGREED, THROUGH: ESTABLISHING WHETHER THE PR E CONDIT IO N S F O R AN AU D IT AR E PRESEN T; A N D CONFIRMING THAT THERE IS A COMMON UNDERSTANDING BETWEEN THE AUDITOR AND MANAGEMENT AND , WHERE APPROPR IATE, THOSE CHAR G ED WITH GOVERNANCE OF THE TERMS OF THE AUDIT ENGAGEMEN T.

6. DEFINITIONS 1 Preconditions for an audit Management 2 use by management of an acceptable financial reporting framework in the preparation of the financial statements and the agreement of management and , where appropriate, those charged with governance to the premise on which an audit is conducted. should be read hereafter as “management and, where appropriate, those charged with governance .”

7. PRECONDITIONS FOR AN AUDIT

8. In order to establish whether the preconditions for an audit are present, the auditor shall: Determine whether the financial reporting framework to be applied in the preparation of the financial statements is acceptable Obtain the agreement of management that it acknowledges and understands its responsibility

9. Management's Responsibility For the preparation of the financial statements in accordance with the applicable financial reporting framework, including where relevant their fair presentation For such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error To provide the auditor with:

10. * * * Access to all information of which management is aware that is relevant to the preparation of the financial statements such as records, documentation and other matters Unrestricted access to persons within the entity from whom the auditor determines it necessary to obtain audit evidence Additional information that the auditor may request from management for the purpose of the audit

11. Limitation on Scope Prior to Audit Engagement Acceptance If the auditor believes the limitation will result in the auditor disclaiming an opinion on the financial statements, the auditor shall not accept such a limited engagement as an audit engagement, unless required by law or regulation to do so.

12. Other Factors Affecting Audit Engagement Acceptance (a) If the auditor has determined that the financial reporting framework to be applied in the preparation of the financial statements is unacceptable, except as provided in paragraph 19 (b) If the agreement referred to in paragraph 6(b) has not been obtained.

13. AGREEMENT ON AUDIT ENGAGEMENT TERMS

14. The agreed terms of the audit engagement shall be recorded in an audit engagement letter or other suitable form of written agreement and shall include: a The objective and scope of the audit of the financial statements; b c The responsibilities of management; The responsibilities of the auditor; Identification of the applicable financial reporting framework for the preparation of the financial statements Reference to the expected form and content of any reports to be issued by the auditor and a statement that there may be circumstances in which a report may differ from its expected form and content. e d

15. RECURRING AUDITS

16. Auditor shall assess: whether circumstances require the terms of the audit engagement to be revised whether there is a need to remind the entity of the existing terms of the audit engagement

17. ACCEPTANCE OF A CHANGE IN THE TERMS OF THE AUDIT ENGAGEMENT

18. Auditor shall not agree to a change in the terms of the audit engagement where there is no reasonable justification for doing so If prior to completing the audit engagement, the auditor is requested to change the audit engagement to an engagement that conveys a lower level of assurance - auditor shall determine whether there is reasonable justification for doing so

19. Auditor and management shall agree on and record the new terms of the engagement in an engagement let ter or other suitable form of written agreement. If the auditor is unable to agree to a change of the terms and is not permitted by management to continue the original audit eng a g e m ent , the au d itor s hall: (1) Withdraw from the audit engagement where possible under applicable law or regulation; and (2) Determine whether there is any obligation, either contractual or otherwise, to report the circumstances to other parties, such as those charged with governance, owners or regulators

20. ADDITIONAL CONSIDERATIONS IN ENGAGEMENT ACCEPTANCE

21. a additi o n al requ i reme n t s c a n be m et throu g h addi t i o n a l d is clos ure s i n the f in a n c ial state m ent s Financial Reporting Standards Supplemented by Law/ Regulation The auditor shall determine whether there are any conflicts between the financial reporting standards and the additional requirements. If such conflicts exist, the auditor shall discuss with management the nature of the additional requirements and shall agree whether: description of the applicable financial reporting framework in the financial statements can be amended accordingly b note If neither of the actions is possibl e, th e a u d itor shall d e ter m in e whe t her it will be necessary to modify th e a u ditor’s opinion in accordance with PSA 705

22. FRAMEWORK UNACCEPTABLE auditor shall accept the audit engagement only if the following conditions are present: 1 Manageme nt agrees t o provid e a dditional dis c losur es in the fin a ncial st a teme n ts require d t o av oid the finan ci al s t at e m ents bei n g mi sle a d in g; Conditions outlined not present - the auditor shall: Other Matters Affecting Acceptance 2 It is recognized in the terms of the audit engagement that: The auditor’s report on the financial statements will incorporate an Emphasis of Matter paragraph, drawing users’ attention to the additional disclosures, in accordance with PSA 706 Unless the auditor is required by law or regulation to express the auditor’s opinion on the financial statements by using the phrases “present fairly, in all material respects” in accordance with the applicable financial reporting framework, the auditor’s opinion on the financial statements will not include such phrases. (a) Evaluate the e ff e c t o f t he m isleadin g nature of the financial statements on th e auditor’s report (b) Include appropriate reference to this matter in the terms of the audit engagement.

23. Whether users might misunderstand the assurance obtained from the audit of the financial statements and, if so, Note: If the a uditor conclude s t h at additi o nal explanation in the a u dito r ’s re port c a nnot mitigate possi ble misunderst a nding, th e a uditor s hall n ot acc e pt t h e audit en gagement, u nles s r e quired by law or regulation to do so . AUDITOR'S REPORT PRESCRIBED BY LAW Whether additiona l e xp l anation in the a uditor’ s repor t c a n m i tig a te p o ssible mis u nder s tand in g Auditors shall evaluate:

24. APPLICATION AND OTHER EXPLANATORY MATERIALS

25. SCOPE OF THIS PSA Assurance engagements, which include audit engagements, may only be accepted when the practitioner considers that relevant ethical requirements such as independence and professional competence will be satisfied, and when the engagement exhibits certain characteristics This PSA deals with those matters (or preconditions) that are within the control of the entity and upon which it is necessary for the auditor and the entity’s management to agree.

26. Preconditions for an Audit The applicable financial reporting framework provides the criteria the auditor uses to audit the financial statements, including where relevant their fair presentation. The Financial Reporting Framework Without an acceptable financial reporting framework - auditor does not have suitable criteria for auditing the financial statements

27. Nature of Entity a na ture of the financial s tatement s , whether law or regulat io n p r e scr i bes the a pplicable financial reporting framework c Purpose of the Financial Statements b Fa ctors th at ar e rele v a nt t o th e aud i tor’ s deter m inati o n of the acceptab i li t y of th e f inancia l r e porti ng f ra m ework: Acceptability of Financial Reporting Framework

28. General Purpose Frameworks International Financial Reporting Standards (IFRS) Philippine Financial Reporting Standards (PFRS) International Public Sector Accounting Standards (IPSAS) Accounting Principle These financial reporting standards are often identified as the applicable financial reporting framework in law or regulation governing the preparation of general purpose financial statements

29. Financial Reporting Frameworks prescribed by Law or Regulation In accordance with paragraph 6(a), the auditor is required to determine whether the financial reporting framework, to be applied in the preparation of the financial statements, is acceptable. In some jurisdictions, law or regulation may prescribe the financial reporting framework to be used in the preparation of general-purpose financial statements for certain types of entities. In the absence of indications to the contrary, such a financial reporting framework is presumed to be acceptable for general purpose financial statements prepared by such entities Note: In the event that the framework is not considered to be acceptable, paragraphs 19-20 apply.

30. When an entity is registered or operating in a jurisdiction that does not have an authorized or recognized standard setting organization, or where use of the financial reporting framework is not prescribed by law or regulation, management identifies a financial reporting framework to be applied in the preparation of the financial statements.

31. Agreement of the Responsibilities of Management An audit in accordance with PSAs is conducted on the premise that management has acknowledged and understands that it has the responsibilities set out in paragraph 6(b). In certain jurisdictions, such responsibilities may be specified in law or regulation. In others, there may be little or no legal or regulatory definition of such responsibilities. . PSAs do not override law or regulation in such matters. However, the concept of an independent audit requires that the auditor’s role does not involve taking responsibility for the preparation of the financial statements or for the entity’s related internal control, and that the auditor has a reasonable expectation of obtaining the information necessary for the audit in so far as management is able to provide or procure it. The premise is fundamental to the conduct of an independent audit. Note: To avoid misunderstanding, agreement is reached with management that it acknowledges and understands that it has such responsibilities as part of agreeing and recording the terms of the audit engagement in paragraphs 9-12.

32. Agreement of the Responsibilities of Management The way in which the responsibilities for financial reporting are divided between management and those charged with governance will vary according to the resources and structure of the entity and any relevant law or regulation, and the respective roles of management and those charged with governance within the entity. Note: In most cases, management is responsible for execution while those charged with governance have oversight of management. In some cases, those charged with governance will have, or will assume, responsibility for approving the financial statements or monitoring the entity’s internal control related to financial reporting. In larger or public entities, a subgroup of those charged with governance, such as an audit committee, may be charged with certain oversight responsibilities

33. PSA 580 (Revised and Redrafted) It requires the auditor to request management to provide written representations that it has fulfilled certain of its responsibilities. It may therefore be appropriate to make management aware that receipt of such written representations will be expected, together with written representations required by other PSAs and, where necessary, written representations to support other audit evidence relevant to the financial statements or one or more specific assertions in the financial statements. Where management will not acknowledge its responsibilities, or agree to provide the written representations, the auditor will be unable to obtain sufficient appropriate audit evidence. In such circumstances, it would not be appropriate for the auditor to accept the audit engagement, unless law or regulation requires the auditor to do so. Note: In cases where the auditor is required to accept the audit engagement, the auditor may need to explain to management the importance of these matters, and the implications for the auditor’s report.

34. Preparation of the Financial Statements Most financial reporting frameworks include requirements relating to the presentation of the financial statements; for such frameworks, preparation of the financial statements in accordance with the financial reporting framework includes presentation. In the case of a fair presentation framework the importance of the reporting objective of fair presentation is such that the premise agreed with management includes specific reference to fair presentation in accordance with the financial reporting framework.

35. Internal Control Management maintains such internal control as it determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Internal control, no matter how effective, can provide an entity with only reasonable assurance about achieving the entity’s financial reporting objectives due to the inherent limitations of internal control. An independent audit conducted in accordance with the PSAs does not act as a substitute for the maintenance of internal control necessary for the preparation of financial statements by management. Accordingly, the auditor is required to obtain the agreement of management that it acknowledges and understands its responsibility for internal control. Note: the agreement required by paragraph 6(b)(ii) does not imply that the auditor will find that internal control maintained by management has achieved its purpose or will be free of deficiencies. It is for management to determine what internal control is necessary to enable the preparation of the financial statements.

36. Internal Control encompasses a wide range of activities within components that may be described as the control environment the entity’s risk assessment process. the information system, including the related business processes relevant to financial reporting, and communication; control activities; and monitoring of controls. This division, however, does not necessarily reflect how a particular entity may design, implement and maintain its internal control, or how it may classify any particular component. An entity’s internal control will reflect the needs of management, the complexity of the business, the nature of the risks to which the entity is subject, and relevant laws or regulation.

37. Internal Control In some jurisdictions, law or regulation may refer to the responsibility of management for the adequacy of accounting books and records, or accounting systems. In some cases, general practice may assume a distinction between accounting books and records or accounting systems on the one hand, and internal control or controls on the other. accounting books and records, or accounting systems, are an integral part of internal control as referred to in paragraph A18, no specific reference is made to them in paragraph 6(b)(ii) for the description of the responsibility of management. Note: To avoid misunderstanding, it may be appropriate for the auditor to explain to management the scope of this responsibility.

38. Audit Engagement Letter It is in the interests of both the entity and the auditor that the auditor sends an audit engagement letter before the commencement of the audit to help avoid misunderstandings with respect to the audit. The form and content of the audit engagement letter may vary for each entity. Information included in the audit engagement letter on the auditor’s responsibilities may be based on PSA 200 (Revised and Redrafted). Paragraphs 6(b) and 12 of this PSA deals with the description of the responsibilities of management. In addition to including the matters required by paragraph 10.

39. Ela bor a tio n of th e s c op e of the a udit, i n clu d ing ref er ence t o applicable legi s l ati on, r e gulations, PSAs, and e th ical a nd o t her p r onounc em ents of pr o fess i o n al bodies to whi c h th e a uditor adhere s. Audit Engagement Letter may make reference to, for example: The fact that be cau se of the i nheren t lim i tatio ns of an audi t, toge th er with the i n her e n t li m i t ation s of int ernal con t r o l , there is an unavoi d a b l e risk that s ome material misstatements may n ot be det ected, even th oug h the audit is pr o pe r ly pl a nne d and p er form e d in accordance with PSA s. The form of any other co mm unicat i on of res u l t s o f the audit eng a g e m e nt . Arrange m e n t s regardi ng t he plan ning and pe r f o rmance of th e au d i t , i n cl u d ing the c o mposition o f the audit te a m . The expectation th at man a gement will provide written representations The agr eemen t of manageme nt to make available t o the audit or dr a ft fin a n c i al stat eme n t s and a ny accompanyin g other information i n ti me t o all o w th e a u di tor to complete the audit in acc or dance with t he p r opo sed timetable.

40. The agr eeme nt of manage ment to in f orm the audit or of f a c ts t hat m a y a ff e ct the f i n ancial st at eme n t s, of which m anageme n t ma y become aware durin g the p e rio d fr om the da t e of th e au di tor’ s report to th e date the financi al s t atements are is sued. Audit Engagement Letter may make reference to, for example: A request for management to acknowledge receipt of the audit engagement letter and to agree to the terms of the engagement outlined therein. The basis on which fees a re compu t ed and any billing arrangements.

41. Arrangements concerning the involvement of other audito rs and experts in some aspec ts of th e audit. Arr angements concerning the involvement of internal auditors and other staff of the entity Arrangements to be made with the predecessor auditor, if any, in the case of an initial audit. Any restriction of the auditor’s liability when such possibility exists. A reference to any further agreements between the auditor and the entity. Any obligations to provideaudit working papers to other parties. When relevant, the following points could also be made in the audit engagement letter:

42. Audit Engagement Letter Sample

43. Audit Engagement Letter Sample

44. Audit Engagement Letter Sample

45. Audits of Components When the auditor of a parent entity is also the auditor of a component, the factors that may influence the decision whether to send a separate audit engagement letter to the component include the following: Who appoints the component auditor Whether a separate auditor’s report is to be issued on the component; Legal requirements in relation to audit appointments; Degree of ownership by parent; and Degree of independence of the component management from the parent entity.

46. Recurring Audits The auditor may decide not to send a new audit engagement letter or other written agreement each period The following factors may make it appropriate to revise the terms of the audit engagement or to remind the entity of existing terms: Any indication that the entity misunderstands the objective and scope of the audit. Any revised or special terms of the audit engagement. A recent change of senior management. A recent change of senior management. A significant change in nature or size of the entity’s business. A change in legal or regulatory requirements. A change in the financial reporting framework adopted in the preparation of the financial statements. A change in other reporting requirements.

47. Written Representations (PSA 580)

48. OBJECTIVES a) To obtain written representations from management and, where appropriate those charged with governance that they believe that they have fulfilled their responsibility for the preparation of the financial statements and for the completeness of the information provided to the auditor; b) To support other audit evidence relevant to the financial statements or specific assertions in the financial statements by means of written representations if determined necessary by the auditor or required by other PSAs; and c) To respond appropriately to written representations provided by management and, where appropriate, those charged with governance, or if management or, where appropriate, those charged with governance does not provide the written representations requested by the auditor.

49. Definition 1 Management responsible for the preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework in accordance with the applicable financial reporting framework.

50. Written Representations about Management’s Responsibilities The auditor shall request management to provide a written representation that it has fulfilled its responsibility for the preparation of the financial statements in accordance with the applicable financial reporting framework, including where relevant their fair presentation Preparation of the Financial Statements Information Provided and Completeness of Transactions The auditor shall request management to provide a written representation that: a) It has provided the auditor with all relevant information and access as agreed in the terms of the audit engagement, and b) All transactions have been recorded and are reflected in the financial statements

51. Written Representations about Management’s Responsibilities Management’s responsibilities shall be described in the written representations required by the abovementioned paragraphs (paragraphs 10 and 11) in the manner in which these responsibilities are described in the terms of the audit engagement. Description of Management’s Responsibilities in the Written Representations Referring to the paragraphs 10 and 11, audit evidence obtained during the audit is not sufficient without obtaining confirmation from management that it believes that it has fulfilled those responsibilities

52. Form of Written Representations Written representations are required to be included in a representation letter addressed to the auditor. In some jurisdictions, however, management may be required by law or regulation to make a written public statement about its responsibilities. The auditor may determine that it is an appropriate form of written representation in respect of some or all of the representations required by paragraph 10 or 11. Factors that may affect the auditor’s determination include: a) Whether the statement includes confirmation of the fulfillment of the responsibilities referred to in paragraphs 10 and 11 b) Whether the statement has been given or approved by those from whom the auditor requests the relevant written representations. c) Whether a copy of the statement is provided to the auditor as near as practicable to, but not after, the date of the auditor’s report on the financial statements

53. Form of Written Representations The auditor is not able to judge solely on other audit evidence whether management has fulfilled the responsibilities referred to in paragraphs 10 and 11. Therefore, if, the auditor concludes that the written representations about these matters are unreliable, or if management does not provide those written representations, the auditor is unable to obtain sufficient appropriate audit evidence. PSA 705 (Revised and Redrafted) requires the auditor to disclaim an opinion on the financial statements in such circumstances. Written Representations about Management’s Responsibilities

54. Illustrative Representation Letter We have fulfilled our responsibilities, as set out in the terms of the audit engagement dated [insert date], for the preparation of the financial statements in accordance with Philippine Financial Reporting Standards; and in particular, the financial statements are fairly presented in accordance therewith. Financial Statements Information provided: Access to all information Additional information Unrestricted access to persons within the entity

55. Forming an Opinion and Reporting on Financial Statements (PSA 700 Redrafted)

56. Management’s Responsibility for the Financial Statements The auditor’s report need not refer specifically to “management,” but shall use the term that is appropriate in the context of the legal framework in the particular jurisdiction. The auditor’s report shall include a section with the heading “Management’s [or other appropriate term] Responsibility for the Financial Statements.” The auditor’s report shall describe management’s responsibility for the preparation of the financial statements Where the financial statements are prepared in accordance with a fair presentation framework, the explanation of management’s responsibility for the financial statements in the auditor’s report shall refer to “the preparation and fair presentation of these financial statements”.

57. In some cases, law or regulation of the relevant jurisdiction prescribes the wording of the auditor’s report (which in particular includes the auditor’s opinion) in terms that are significantly different from the requirements of PSAs. In these circumstances, PSA 210 (Redrafted) requires the auditor to evaluate: Wording of the auditor’s opinion prescribed by law or regulation If the auditor concludes that additional explanation in the auditor’s report cannot mitigate possible misunderstanding, PSA 210 (Redrafted) requires the auditor not to accept the audit engagement, unless required by law or regulation to do so a) Whether users might misunderstand the assurance obtained from the audit of the financial statements and, if so, b) Whether additional explanation in the auditor’s report can mitigate possible misunderstanding. Auditor’s Opinion

58. END OF PRESENTATION