Question 7:
Which of the following should be included in an audit engagement letter?
I. Objective and scope of the audit
II. Results of previous audit
III. Management responsibilities
IV. Need to maintain professional scepticism
A. I and II
B. I and III
C. I, II and III
D. II and III
E. III and IV
The correct answer is (B)
Past Question Review:
Prior to the commencement of any audit work, the auditor should agree in writing, the precise scope and nature of the audit work to be undertaken. The letter of engagement serves this purpose.
The letter of engagement is therefore a letter sent by the auditors to a client at the beginning of any audit. It sets out the terms of the engagement and forms the basis of the contract.
Purposes of Letter of Engagement
(a) To define clearly the extent of the auditors‟ and directors‟ responsibilities.
(b) By formalizing the terms of the engagement, it helps to minimize the possibilities of any misunderstanding between the auditors and the client.
(c) It provides written confirmation of the auditors‟ acceptance of the appointment.
(d) It confirms in writing verbal arrangements in respect of scope of the audit, the form of their report and the scope of any non-audit service.
Contents of Letter of Engagement
The main emphasis of this letter is on the relevant responsibilities of the directors and the auditors and the scope of the audit. It should also identify any report which the auditor must submit in addition to the statutory audit report.
Specific contents are outlined below:
a) The board of directors’ responsibilities in respect of the proper books of accounts and financial statements.
b) The auditors’ responsibilities to report on the financial statements; the scope and basis of the audit work to be undertaken.
c) Fees and billing arrangement (it does not state the fees payable)
d) Where appropriate, arrangement concerning the involvement of other auditors and experts in some aspect of the audit.
e) Any agreement for the auditor to provide taxation services.
f) Arrangements, if any, to be made with the predecessor auditors.
g) Any restriction of the auditors’ liabilities to the client (this is not possible with limited companies).
h) A reference to any further agreements between the auditors and the clients.
i) A proposed time-table for the agreement.
j) A request for written acknowledgement of the letter.
So the correct answer is (B).
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