THE COMPANIES ACT AND THE AUDITOR:

Certain provisions in the Companies Act (Chapter 24:03) concern the accounts and the audit
and it is important to consider the implications of these sections on the conduct of an audit.
Some very essential sections and subsections are considered below-

Keeping of books of accounts (S. 140)

Every company shall cause to be kept in the English Language proper books of accounts with
respect to-

a) all sums of money received and expended by the company and the matters in respect of
which the receipt and expenditure takes place;
b) all sales and purchases of goods by the company;
c) the assets and liabilities of the company

The implication of this section is that proper books of accounts shall not be deemed to be kept if
they are not kept such books as are necessary to give a true and fair view of the state of the
companies affairs and to explain transactions

Accounts and auditor’s report to be annexed to the balance sheet: (S. 146)

Every balance sheet of a company shall be signed on behalf of the Board by two of the directors
of the company.

The Profit & Loss Account and any group accounts laid before a company in general meeting
shall be annexed to the balance sheet and approved by the Board of Directors before the
balance sheet is signed on its behalf and the auditor’s report shall be attached thereto except in
the case of a private company not required to appoint an auditor.

Appointment and Remuneration of auditors: (S. 150)

The first auditor of a company shall be appointed by the directors within one month of the issue
of the certificate to commence business in the case of a public company and in the case of
other companies, within one month of the issue of the certificate of incorporation. An auditor so
appointed shall hold office until the conclusion of the first annual general meeting.
Provided that the company may at a general meeting remove such auditor and appoint in his
place any other person who has by special notice been nominated for appointment by any
member of the company and of whose nomination notice has been given to the members of the
company not less than 14 days before the date of such meeting.

Every company shall, at each annual general meeting appoint an auditor to hold office from the
conclusion of that meeting until the conclusion of the next annual general meeting.

Where at an annual general meeting no auditor is appointed or re-appointed, the Minister may
appoint a person to fill the vacancy.

The directors may fill any casual vacancy in the office of auditor but while such vacancy
continues, the surviving or continuing auditor, if any, may act.

The remuneration of an auditor shall be fixed by the company in general meeting or in such
manner as the company in general meeting may determine. Any sums paid by the company in
respect of the auditor’s expenses shall be deemed to be included in the expression
“remuneration”

A private company shall not be required to appoint an auditor if-

a) the number of members in such company does not exceed ten; and
b) none of the members of such company is-

(i) a public company, whether incorporated under this Act, or the law of a foreign
country; or
(ii) a private company which is a subsidiary of a public company

and

c) such company is not subsidiary of a holding company which has itself

appointed auditors; and

d) all the members in such company agree that an auditor shall not be
appointed.

Disqualifications for appointment as auditor (S. 152)

(1) None of the following persons shall be qualified for appointment as auditors of a company-

a) an officer or servant of the company;

b) a person who is a partner of an officer or servant of the company;
c) a person who is an employer or employee of an officer or servant of the company;
d) a body corporate;
e) a person who is an officer or servant of a body corporate which is an officer of the
company;
f) a person who by himself, or his partner or his employee, regularly performs the work of
secretary or bookkeeper to the company.

(2) A person shall also not be qualified for appointment as auditor of a company if he is by
virtue of subsection (1) above, disqualified for appointment as auditor of any other body
corporate which is that company’s subsidiary or holding company, or a subsidiary of that
company’s holding company, or would be so disqualified if the body corporate were a
company.

Auditor’s Duties (Auditor’s Report: (S. 153)

The auditor shall make a report to the members on the accounts examined by him and on every
balance sheet, every profit and loss account and all group accounts laid before the company in
general meeting during his tenure of office and the report shall contain the following statement-

“ whether, in his opinion, balance sheet and profit and loss account of the company or the group
accounts in the case of a holding company, are properly drawn up in accordance with this Act
so as to give a true and fair view of the state of the company’s affairs at the date of its balance
sheet and of its profit and loss for its financial year ended on that date.”
The auditor shall include in his report statements which, in his opinion, are necessary if-

a) he has not received all the information and explanations which to the best of his
knowledge and belief were necessary for the purposes of the audit;
b) so far as appears from his examinations, proper books of accounts have not been kept
by the company;
c) proper returns adequate for the purposes of the audit have not been received from
branches not visited by him;
d) the company’s balance sheet and profit and loss account are not in agreement with the
books of accounts and returns from branches.

In the event of the auditor being unable to make such report or to make it without further
qualifications he shall inscribe upon or attach to the balance sheet a statement of fact or the
nature of the qualification, as the case may be, and he shall set forth therein the facts or
circumstances which prevent him from making the report or from making it without qualification.

Auditor’s Rights: (S. 154)

Every auditor of a company shall have a right of access at all times to the books, accounts,
vouchers and securities of the company and shall be entitled to require from the officers of the
company such information and explanations as he thinks necessary.

Every auditor of a company shall be entitled to attend any general meeting of the company and
to receive all notices of and other communications relating to any general meeting which any
member of the company is entitled to receive and to be heard at any general meeting which he
attends on any part of the business of the meeting which concerns him as auditor.

PROFESSIONAL ETHICS:

The fundamental principles require that an auditor should behave with integrity in all
professional and business relationships and that he/she should strive for objectivity in all
professional and business judgements.

Objectivity is a state of mind, but in certain roles the preservation of objectivity needs to be
protected and demonstrated by the maintenance of the auditor’s independence from influences
which could affect his/her objectivity.

The following examples describe specific circumstances and relationships that may create
threats to independence. The examples describe potential threats created and the safeguards
that may be appropriate to eliminate the threats or reduce them to an acceptable level in each
circumstance.

The examples are not all inclusive. In practice, the firm, network firms and the members of the
assurance team will be required to assess the implications of similar, but different,
circumstances and relationships and to determine whether safeguards can be applied to
satisfactorily address the threats to independence.

Beneficial Interests:

A financial interest in an assurance client may create a self-interest threat. In evaluating the
significance of the threat, and the appropriate safeguards to be applied to eliminate the threat or
reduce it to an acceptable level, it is necessary to examine the nature of the financial interest.
This includes an evaluation of the role of the person holding the financial interest, the materiality
of the financial interest and the type of financial interest (direct or indirect).

If a firm, or a network firm, has a direct financial interest in a financial statement audit client of
the firm, the self-interest threat created would be so significant that no safeguard could reduce
the threat to an acceptable level. Consequently, disposal of the financial interest would be the
only action appropriate to permit the firm to perform the engagement.

If a firm, or a network firm, has a material indirect financial interest in a financial statement audit
client of the firm, a self-interest threat is also created.
The only actions appropriate to permit the firm to perform the engagement would be for the firm,
or the network firm, either to dispose of the indirect interest in total or to dispose of a sufficient
amount of it so that the remaining interest is no longer material.

Loans

A loan, or a guarantee of a loan, from an assurance client that is a bank, or a similar institution,
to the firm would not create a threat to independence provided the loan, or guarantee, is made
under normal lending procedures, terms and requirements and the loan is immaterial to both the
firm and the assurance client. If the loan is material to the assurance client or the firm, it may be
possible, through the application of safeguards, to reduce the self-interest threat created to an
acceptable level. Such safeguards might include involving an additional professional accountant
from outside the firm, or network firm, to review the work performed.

A loan, or a guarantee of a loan, from an assurance client that is a bank, or a similar institution,
to a member of the assurance team or their immediate family would not create a threat to
independence provided the loan, or guarantee, is made under normal lending procedures, terms
and requirements. Examples of such loans include home mortgages, bank overdrafts, car loans
and credit card balances.

Similarly, deposits made by, or brokerage accounts of, a firm or a member of the assurance
team with an assurance client that is a bank, broker or similar institution would not create a
threat to independence provided the deposit or account is held under normal commercial terms.

Close business relationships with assurance clients.

A close business relationship between a firm or a member of the assurance team and the
assurance client or its management, or between the firm, a network firm and a financial
statement audit client, will involve a commercial or common financial interest and may create
self-interest and intimidation threats. The following are examples of such relationships: e.g.
having a material financial interest in a joint venture with the assurance client or a controlling
owner, director, officer or other individual who performs senior managerial functions for that
client;
Family and personal relationships
Family and personal relationships between a member of the assurance team and a director, an
officer or certain employees, depending on their role, of the assurance client may create self-
interest, familiarity or intimidation threats. It is impracticable to attempt to describe in detail the
significance of the threats that such relationships may create. The significance will depend upon
a number of factors including the individual's responsibilities on the assurance engagement, the
closeness of the relationship and the role of the family member or other individual within the
assurance client. Consequently, there is a wide spectrum of circumstances that will need to be
evaluated and safeguards to be applied to reduce the threat to an acceptable level.

When an immediate family member of a member of the assurance team is a director, an officer
or an employee of the assurance client in a position to exert direct and significant influence over
the subject matter of the assurance engagement, or was in such a position during any period
covered by the engagement, the threats to independence can only be reduced to an acceptable
level by removing the individual from the assurance team. The closeness of the relationship is
such that no other safeguard could reduce the threat to independence to an acceptable level. If
application of this safeguard is not used, the only course of action is to withdraw from the
assurance engagement. For example, in the case of an audit of financial statements, if the
spouse of a member of the assurance team is an employee in a position to exert direct and
significant influence on the preparation of the audit client's accounting records or financial
statements, the threat to independence could only be reduced to an acceptable level by
removing the individual from the assurance team.

When an immediate family member of a member of the assurance team is a director, an officer
or an employee of the assurance client in a position to exert direct and significant influence over
the subject matter information of the assurance engagement, threats to independence may be
created.

Employment with assurance clients

A firm's or a member of the assurance team's independence may be threatened if a director, an

officer or an employee of the assurance client in a position to exert direct and significant
influence over the subject matter information of the assurance engagement has been a member
of the assurance team or partner of the firm. Such circumstances may create self-interest,
familiarity and intimidation threats particularly when significant connections remain between the
individual and his or her former firm. Similarly, a member of the assurance team's independence
may be threatened when an individual participates in the assurance engagement knowing, or
having reason to believe, that he or she is to, or may, join the assurance client some time in the
future.

Serving as an officer or director on the board of assurance clients

If a partner or employee of the firm serves as an officer or as a director on the board of an
assurance client, the self-review and self-interest threats created would be so significant that no
safeguard could reduce the threats to an acceptable level. In the case of a financial statement
audit engagement, if a partner or employee of a network firm were to serve as an officer or as a
director on the board of an audit client, the threats created would be so significant that no
safeguard could reduce the threats to an acceptable level. Consequently, if such an individual
were to accept such a position, the only course of action is to refuse to perform, or to withdraw
from, the assurance engagement.

If a partner or employee of the firm or a network firm serves as company secretary for a
financial statement audit client, the self-review and advocacy threats created would generally be
so significant that no safeguard could reduce the threat to an acceptable level.

Preparing accounting records and financial statements

Assisting a financial statement audit client in matters such as preparing accounting records or
financial statements may create a self-review threat when the financial statements are
subsequently audited by the firm.

It is the responsibility of financial statement audit client management to ensure that accounting
records are kept and financial statements are prepared, although they may request the firm to
provide assistance. If firm, or network firm, personnel providing such assistance make
management decisions, the self-review threat created could not be reduced to an acceptable
level by any safeguards. Consequently, personnel should not make such decisions. Examples
of such managerial decisions include the following:

-determining or changing journal entries, or the classifications for accounts or transaction or

other accounting records.
-authorising or approving transactions; and
-preparing source documents or originating data (including decisions on valuation assumptions),
or making changes to such documents or data.

Gifts and hospitality

Members, or an immediate or close family member, may be offered gifts and hospitality from a
client. Such an offer ordinarily gives rise to threats to compliance with the fundamental
principles. For example, self-interest threats to objectivity may be created if a gift from a client is
accepted; intimidation threats to objectivity may result from the possibility of such offers being
made public.

The significance of such threats will depend on the nature, value and intent behind the offer.
Where gifts or hospitality which a reasonable and informed third party, having knowledge of all
relevant information, would consider clearly insignificant are made, the auditor’s may conclude
that the offer is made in the normal course of business without the specific intent to influence
decision making or to obtain information. In such cases, the auditor may generally conclude that
there is no significant threat to compliance with the fundamental principles.

QUALITY CONTROL (ISA 220)

Leadership Responsibilities for Quality on Audits

The engagement partner shall take responsibility for the overall quality on each audit
engagement to which that partner is assigned. Ordinarily, the engagement partner sets an
example regarding audit quality to the other members of the engagement team through all
stages of the audit engagement. Ordinarily, this example is provided through the actions of the
engagement partner and through appropriate messages to the engagement team. Such actions
and messages emphasise:

(a) the importance of: (i) performing work that complies with Auditing Standards and
regulatory and legal requirements; (ii) complying with the firm’s quality control policies
and procedures as applicable; and (iii) issuing auditor’s reports that are appropriate in
the circumstances;
 (b) the fact that quality is essential in performing audit engagements.

The engagement partner shall consider whether members of the engagement team have
complied with relevant ethical requirements relating to audit engagements.

Ethical requirements relating to audit engagements ordinarily include the requirements of the
applicable code of professional conduct of a professional accounting body that establishes the
fundamental principles of professional ethics, which include:

(a) integrity;
(b) objectivity;
(c) professional competence and due care;
(d) confidentiality; and
(e) professional behaviour.

Engagement Team:

Ordinarily, the engagement partner remains alert for evidence of non-compliance with relevant
ethical requirements relating to audit engagements.
Enquiry and observation regarding ethical matters amongst the engagement partner and other
members of the engagement team occur, as necessary, throughout the audit engagement. If
matters come to the engagement partner’s attention through the firm’s systems or otherwise
that indicate that members of the engagement team have not complied with ethical
requirements, ordinarily the partner, in consultation with others in the firm, determines the
appropriate action. Ordinarily, the engagement partner and, where appropriate, other members
of the engagement team, document issues identified and how they were resolved.

The engagement partner shall form a conclusion on compliance with independence

requirements that apply to the audit engagement. In doing so, the engagement partner
shall:

(a) obtain relevant information from the firm and, where applicable, network firms, to identify
and evaluate circumstances and relationships that create threats to independence;
(b) evaluate information on identified breaches, if any, of the firm’s independence policies
and procedures to determine whether they create a threat to independence for the audit
engagement;
(c) take appropriate action to eliminate such threats or reduce them to an acceptable level
by applying safeguards. The engagement partner shall promptly report to the firm any
failure to resolve the matter for appropriate action; and
(d) document conclusions on independence and any relevant discussions with the firm that
support these conclusions.

Where the engagement partner obtains information that would have caused the firm to decline
the audit engagement if that information had been available earlier, the engagement partner
shall communicate that information promptly to the firm, so that the firm and the engagement
partner can take the necessary action.

Acceptance and continuance of client relationships and specific audit engagements include
considering:
• The integrity of the principal owners, key management and those charged with governance of
the entity.
• Whether the engagement team is competent to perform the audit engagement and has the
necessary time and resources.
• Whether the firm and the engagement team can comply with ethical requirements.
Deciding whether to continue a client relationship ordinarily includes consideration of significant
matters that have arisen during the current or previous audit engagements, and their
implications for continuing the relationship. For example, a client may have started to expand its
business operations into an area where the firm does not possess the necessary knowledge or
expertise.

The engagement partner shall take responsibility for the direction, supervision and performance
of the audit engagement in compliance with Auditing Standards and regulatory and legal
requirements, and for the auditor’s report that is issued to be appropriate in the circumstances.

Ordinarily, the engagement partner directs the audit engagement by informing the members of
the engagement team of:

(a) their responsibilities;

(b) the nature of the entity’s business;
(c) risk-related issues;
(d) problems that may arise; and
(e) the detailed approach to the performance of the engagement.

Ordinarily, the engagement team’s responsibilities include maintaining an objective state of

mind and an appropriate level of professional skepticism, and performing the work delegated to
them in accordance with the ethical principle of due care. Members of the engagement team are
ordinarily encouraged to raise questions with more experienced team members and
communicate as appropriate within the engagement team. It is important that all members of the
engagement team understand the objectives of the work they are to perform. Appropriate team-
working and training are necessary to assist less experienced members of the engagement
team to clearly understand the objectives of the assigned work.

Supervision:

Supervision includes the following:

• Tracking the progress of the audit engagement.

• Considering the capabilities and competence of individual members of the engagement team,
whether they have sufficient time to carry out their work, whether they understand their
instructions, and whether the work is being carried out in accordance with the planned approach
to the audit engagement.
• Addressing significant issues arising during the audit engagement, considering their
significance and modifying the planned approach appropriately.
• Identifying matters for consultation or consideration by more experienced engagement team
members during the audit engagement.

The Engagement Partner has the overall responsibility of the supervision of the audit but the
Team Leader or the Audit Manager normally is assigned the hands-on duty to supervise audit
staff at the client’s premises (supervision of field work) and then reports to the Engagement
Partner.

Review:
Responsibilities are determined on the basis that more experienced team members, including
the engagement partner, review work performed by less experienced team members. Ordinarily,
reviewers consider whether:
(a) the work has been performed in accordance with Auditing Standards and regulatory and
legal requirements;
(b) significant matters have been raised for further consideration;
(c) appropriate consultations have taken place and the resulting conclusions have been
documented and implemented;
(d) there is a need to revise the nature, timing and extent of work performed;
(e) the work performed supports the conclusions reached and is appropriately documented;
(f) the evidence obtained is sufficient and appropriate to support the auditor’s report; and
(g) the objectives of the engagement procedures have been achieved.

Consultation:

The Engagement Partner shall:

(a) be responsible for the engagement team undertaking appropriate consultation on difficult
or contentious matters;
(b) be satisfied that members of the engagement team have undertaken appropriate
consultation during the course of the engagement, both within the engagement team and
between the engagement team and others at the appropriate level within or outside the
firm;
(c) be satisfied that the nature and scope of, and conclusions resulting from, such
consultations are documented and agreed with the party consulted; and determine that
conclusions resulting from consultations have been implemented.

Engagement Quality Control Review

For audits of financial statements of listed entities or in fulfillment of the firm’s quality control
procedures, the Engagement Partner shall:

(a) determine that an engagement quality control reviewer has been appointed;
(b) discuss significant matters arising during the audit engagement, including those
identified during the engagement quality control review, with the engagement quality
control reviewer; and
(c) not issue the auditor’s report until the completion of the engagement quality control
review.

An engagement quality control review shall include an objective evaluation of:

(a) the significant judgements made by the engagement team; and

(b) the conclusions reached in formulating the auditor’s report.

Ordinarily, an engagement quality control review involves:

• Discussion with the engagement partner.

• A review of the financial information and the auditor’s report.
• Consideration of whether the auditor’s report is appropriate.
• A review of selected audit documentation relating to the significant judgements the
engagement team made and the conclusions reached. The extent of the review depends on the
complexity of the audit engagement and the risk that the auditor’s report might not be
appropriate in the circumstances.
• Judgements made, particularly with respect to materiality and significant risks.
• Whether appropriate consultation has taken place on matters involving differences of opinion
or other difficult or contentious matters, and the conclusions arising from those consultations.
• The significance and disposition of corrected and uncorrected misstatements identified during
the audit.
• The matters to be communicated to management and those charged with governance and,
where applicable, other parties such as regulatory bodies.
• Whether audit documentation selected for review reflects the work performed in relation to the
significant judgements and supports the conclusions reached.
• The appropriateness of the auditor’s report to be issued. Engagement quality control reviews
for audits of historical financial information other than an audit of a financial statements may,
depending on the circumstances, include some or all of these considerations.

Monitoring:

The quality control requirements for firms issued by a professional accounting body, require the
firm to establish policies and procedures designed to provide it with reasonable assurance that
the policies and procedures relating to the system of quality control are relevant, adequate,
operating effectively and complied with in practice. The engagement partner ordinarily considers
the results of the monitoring process as evidenced in the latest information circulated by the firm
and, if applicable, other network firms. The engagement partner ordinarily considers whether:

(a) deficiencies noted affect the audit engagement; and

(b) the measures the firm took to rectify the situation are sufficient in the context of the audit.

AUDIT ENGAGEMENT (ISA 210)

Introduction:

The purpose of this Auditing Standard is to establish mandatory requirements and to provide
explanatory guidance on:

(a) agreeing and documenting the terms of the audit engagement with the entity; and
(b) the auditor’s response to a request by the entity to change the terms of the audit
engagement to one that provides a lower level of assurance. The auditor shall agree on
the terms of the audit engagement with the entity, which shall be recorded in writing by
the auditor and forwarded to the entity. When the audit engagement is undertaken
pursuant to legislation, the minimum applicable terms are those contained in the
legislation. The agreed terms are ordinarily recorded in an audit engagement letter but
may also be recorded in another suitable form of contract.

Audit Engagement Letters

It is in the interests of both the entity and the auditor that the auditor sends an engagement
letter, preferably before the commencement of the audit, to help avoid misunderstandings with
respect to the engagement. Ordinarily, the engagement letter documents and confirms the
auditor’s acceptance of the appointment, the objective and scope of the audit, the extent of the
auditor’s responsibilities to the entity and the form of any reports.
Principal Contents

The form and content of audit engagement letters may vary for each entity, but they would
generally include reference to:
• The objective of the audit of the financial statements.

• Management’s responsibility, with oversight from those charged with governance, for the
subject matter of the audit as described in ISA 200 Objective and General Principles Governing
an Audit of a Financial statements.
• The scope of the audit, including reference to applicable regulations and the relevant ethical
requirements relating to audit engagements to which the auditor adheres.
• The form of any reports or other communication of results of the engagement.
• The fact that because of the test nature and other inherent limitations of an audit, together with
the inherent limitations of internal control, there is an unavoidable risk that even some material
misstatement may remain undiscovered.
•Unrestricted access to whatever records, documentation and other information is requested in
connection with the audit.

The auditor may also wish to include in the engagement letter:

• Arrangements regarding the planning and performance of the audit.

• Expectation of receiving from management written confirmation concerning representations
made in connection with the audit.
• Request for the entity to confirm the terms of the engagement by acknowledging receipt of the
engagement letter.
• Description of any other letters or reports the auditor expects to issue to the entity.
• Basis on which fees are computed and any billing arrangements.

When relevant, the following points could also be included:

• Arrangements concerning the involvement of other auditors and experts in some aspects of
the audit.
• Arrangements concerning the involvement of internal auditors and other entity staff.
• 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.
• A reference to other applicable legislation such as the privacy legislation.
• Clarification of the entity’s responsibility for control issues relevant to the presentation of
electronic information, where the entity’s audited financial statements (or other audited subject
matter) is presented on an internet web site.
• A statement confirming that, to the best of the auditor’s knowledge and belief, the auditor
currently meets the independence requirements of the Companies Act in relation to the audit of
the financial statements.
• A statement confirming that, should the auditor become aware that the auditor has
contravened the independence requirements of the Companies Act, the auditor will notify the
entity on a timely basis. The Companies Act contains general and specific provisions in relation
to auditor independence, a range of specific restrictions on the employment relationships
existing between the audited entity and its auditor and provisions relating to the auditor’s
attendance at an entity’s annual general meeting, which the auditor may also include in the
engagement letter.
• The terms of the engagement shall identify the applicable financial reporting framework.

Recurring Audits:

On recurring audits, the auditor shall consider whether circumstances require the terms of the
engagement to be revised, and whether there is a need to re-confirm in writing the existing
terms of the engagement with the entity. The auditor may decide not to send a new
engagement letter each period. However, the following factors may make it appropriate to send
a new engagement letter:
• Any indication that the entity misunderstands the objective and scope of the audit.
• Any revised or special terms of the engagement. • A recent change of senior management or
those charged with governance.
• A significant change in ownership.
• A significant change in the nature or size of the entity’s business.
• Legal or regulatory requirements.

Acceptance of a Change in the Terms of the Engagement:

The auditor who, before the completion of the engagement, is requested to change the
engagement to one which provides a lower level of assurance, shall consider the
appropriateness of doing so. A request from the entity for the auditor to change the terms of the
engagement may result from a change in circumstances affecting the need for the service, a
misunderstanding as to the nature of the audit or related service originally requested or a
restriction on the scope of the engagement.
The auditor needs to carefully consider the reason given for the request, particularly the
implications of a restriction on the scope of the engagement. A change in circumstances that
affects the entity’s requirements, or a misunderstanding concerning the nature of the service
originally requested, is ordinarily considered to be a reasonable basis for requesting a change in
the engagement. In contrast, a change is not considered to be reasonable if it appears that the
change relates to information that is incorrect, incomplete or otherwise unsatisfactory. Before
agreeing to change the audit engagement to a review1 or related service engagement, an
auditor who was engaged to perform the audit in accordance with Auditing Standards ordinarily
considers, in addition to the above matters, any legal or contractual implications of the change.
If the auditor concludes that there is reasonable justification to change the terms of the
engagement and if the audit work performed complies with the Auditing Standards relevant to
the changed terms of the engagement, the report issued would be that appropriate for the
revised terms of the engagement.

APPENDIX 1:

EXAMPLE OF AN ENGAGEMENT LETTER FOR A FINANCIAL STATEMENTS AUDIT

ENGAGEMENT

The following example audit engagement letter is for use as a guide only, in conjunction with the
mandatory requirements and explanatory guidance in this Auditing Standard, and will need to
be varied according to individual needs and circumstances.

To [the board of directors, those charged with governance or the appropriate

representative of senior management]:

You have requested that we audit the financial statements of [name of entity], which comprises
the balance sheet as at 30 June 20XX, and the income statement, statement of changes in
equity and cash flow statement for the year then ended, a summary of significant accounting
policies, other explanatory notes and the directors’ declaration.
We are pleased to confirm our acceptance and our understanding of this engagement by means
of this letter. Our audit will be conducted with the objective of our expressing an opinion on the
financial statements. We will conduct our audit in accordance with International Auditing
Standards. Those Auditing Standards require that we comply with relevant ethical requirements
relating to audit engagements and plan and perform the audit to obtain reasonable assurance
whether the financial statements are free from material misstatement.
An audit involves performing audit procedures to obtain audit evidence about the amounts and
disclosures in the financial statements. The procedures selected depend on the auditor’s
judgement, including the assessment of the risks of material misstatement of the financial
statements, whether due to fraud or error.
An audit also includes evaluating the appropriateness of the financial reporting framework,
accounting policies used and the reasonableness of accounting estimates made by
management, as well as evaluating the overall presentation of the financial statements.
Because of the test nature and other inherent limitations of an audit, together with the inherent
limitations of any accounting and internal control system, there is an unavoidable risk that even
some material misstatements may remain undiscovered.

In making our risk assessments, we consider internal control relevant to the entity’s preparation
of the financial statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
entity’s internal control. However, we expect to provide you with a separate letter concerning
any material weaknesses in the design or implementation of internal control over financial
reporting that come to our attention during the audit of the financial statements.
We take this opportunity to remind you that the responsibility for the preparation and fair
presentation of the financial statements in accordance with International Accounting Standards
and the Companies Act is that of the directors and those charged with governance.
Our auditor’s report will explain that the directors and those charged with governance are
responsible for the preparation and the fair presentation of the financial statements in
accordance with the applicable financial reporting framework and this responsibility includes:
• Designing, implementing and maintaining internal control relevant to the preparation of a
financial statements that is free from misstatement, whether due to fraud or error;
• Selecting and applying appropriate accounting policies; and
• Making accounting estimates that are reasonable in the circumstances.

As part of our audit process, we will request from management written confirmation concerning
representations made to us in connection with the audit.

We look forward to full cooperation from your staff and we trust that they will make available to
us whatever records, documentation and other information we request in connection with our
audit. [Insert additional information here regarding fee arrangements and billings, as
appropriate.]

Please sign and return the attached copy of this letter to indicate that it is in accordance with
your understanding of the arrangements for our audit of the financial statements. Y

Yours faithfully, (signed) ..............................

Name and Title Date Acknowledged on behalf of [entity] by (signed) ...............................

Name and Title Date………………..

MANAGEMENT REPRESENTATIONS: (ISA 580)

Introduction:

The auditor shall endeavour to obtain appropriate representations from management. In certain
audit engagements some of the representations sought by the auditor from management are
required to be given in other appropriate forms, for example the directors’ report under the
Companies Act. Where the directors or management make representations required by statute
or regulation concerning the financial statements, the auditor need not seek a further
representation on those matters.

Acknowledgment by Management of its Responsibility for the Financial statements:

The auditor shall obtain sufficient appropriate audit evidence that management acknowledges
its responsibility for the fair presentation of the financial statements in accordance with the
applicable financial reporting framework, and has approved the financial statements. The
auditor can obtain audit evidence of management’s acknowledgement of such responsibility and
approval from relevant minutes of meetings of those charged with governance, or by obtaining a
written representation from management or a signed copy of the financial statements.

Representations by Management as Audit Evidence:

The auditor shall endeavour to obtain written representations from management on matters
material to the financial statements, when other sufficient appropriate audit evidence cannot
reasonably be expected to exist. The possibility of misunderstandings between the auditor and
management is reduced when oral representations are confirmed by management in writing.
Matters that might be included in a letter from management or in a confirmatory letter to
management are contained in the example of a management representation letter in Appendix 1
to this Auditing Standard. Written representations requested from management may be limited
to matters that are considered either individually or collectively material to the financial
statements. Regarding certain items it may be necessary to inform management of the auditor’s
understanding of materiality.

The auditor shall endeavour to obtain written representations from management that:
(a) it acknowledges its responsibility for the design and implementation of internal control to
prevent and detect error; and

(b) it believes the effects of those uncorrected financial statements misstatements aggregated
by the auditor during the audit are immaterial, both individually and in the aggregate, to the
financial statements taken as a whole. A summary of such items shall be included in or
attached to the written representations.
During the course of an audit, management makes many representations to the auditor, either
unsolicited or in response to specific enquiries. When such representations relate to matters
which are material to the financial statements, the auditor ordinarily needs to:

(a) seek corroborative audit evidence from sources inside or outside the entity;
(b) evaluate whether the representations made by management appear reasonable and
consistent with other audit evidence obtained, including other representations; and
(c) consider whether the individuals making the representations can be expected to be well
informed on the particular matters.

Representations by management cannot be a substitute for other audit evidence that the auditor
could reasonably expect to be available. For example, a representation by management as to
the cost of an asset is not a substitute for the audit evidence of such cost that an auditor would
ordinarily expect to obtain.

If the auditor is unable to obtain sufficient appropriate audit evidence regarding a matter which
has, or may have, a material effect on the financial statements, and such audit evidence is
expected to be available, under ISA 701 Modifications to the Auditor’s Report, this will constitute
a limitation on the scope of the audit, even if a representation from management has been
received on the matter.

In certain instances, audit evidence other than that obtained by performing enquiry may not be
reasonably expected to be available; therefore the auditor ordinarily obtains a written
representation by management. For example, the auditor may not be able to obtain other audit
evidence to corroborate management’s intention to hold a specific investment for long-term
appreciation.

If a representation by management is contradicted by other audit evidence, the auditor shall

investigate the circumstances and, when necessary, reconsider the reliability of other
representations made by management.

Documentation of Representations by Management :

The auditor would ordinarily include in audit working papers evidence of management’s
representations in the form of a summary of oral discussions with management or written
representations from management.

A written representation is ordinarily more reliable audit evidence than an oral representation
and can take the form of:

(a) a representation letter from management;

(b) a letter from the auditor outlining the auditor’s understanding of management’s
representations, duly acknowledged and confirmed by management; or
(c) relevant minutes of meetings of the board of directors or similar body or a signed copy of
the financial statements.

Basic Elements of a Management Representation Letter:

When requesting a management representation letter, the auditor needs to request that it be
addressed to the auditor, contain specified information and be appropriately dated and signed.
A management representation letter would ordinarily be dated the same date as the auditor’s
report. However, in certain circumstances, a separate representation letter regarding specific
transactions or other events may also be obtained during the course of the audit. A
management representation letter would ordinarily be signed by the members of management
who have primary responsibility for the entity and its financial aspects, (ordinarily the senior
executive officer and the senior financial officer), based on the best of their knowledge and
belief. In certain circumstances, the auditor may wish to obtain representation letters from other
members of management. For example, the auditor may wish to obtain a written representation
about the completeness of all minutes of the meetings of shareholders, the board of directors
and important committees from the individual responsible for keeping such minutes.

Action if Management Refuses to Provide Representations:

If management refuses to provide a representation that the auditor considers necessary, this
constitutes a scope limitation and the auditor shall express a qualified opinion or a disclaimer of
opinion. In such circumstances the auditor would ordinarily:

(a) evaluate any reliance placed on other representations made by management during the
course of the audit;
(b) draw to the attention of those charged with governance or management any relevant
statutory and/or regulatory provision which gives the auditor access to records and
information.
(c) consider if the other implications of the refusal may have any additional effect on the
auditor’s report.

APPENDIX 1 EXAMPLE OF A MANAGEMENT REPRESENTATION LETTER

This Appendix provides additional explanatory guidance and/or illustrative examples to assist
auditors with the application of the mandatory requirements of the Auditing Standard, but does
not form part of or add to those mandatory requirements. The following letter is not intended to
be a standard letter. Representations by management will vary from one entity to another and
from one period to the next. Although seeking representations from management on a variety of
matters, a management representation letter may serve to focus management’s attention on
those matters, and thus cause management to specifically address those matters in more detail
than would otherwise be the case. The limitations of management representations as audit
evidence are set out in this Auditing Standard.

Example Letter
[Entity Letterhead]
[Addressee – Auditor] [Date]
We acknowledge our responsibility for ensuring that the financial statements are in accordance
with International Accounting Standards (including the International Accounting Interpretations)
[and, when appropriate, relevant statutory and other requirements],and confirm that the financial
statements are free of material misstatements, including omissions.
This representation letter is provided in connection with your audit of the financial statements of
[name of entity] for the [period] ended [date], for the purpose of you expressing an opinion as to
whether the financial statements are, in all material respects, in accordance with: the
Companies Act , including giving a true and fair view of the [company/entity]’s financial position
as at [date] and of its performance for the year ended on that date; and complying with
International Accounting Standards (including the International Accounting Interpretations) and,
when appropriate, relevant statutory and other requirements].
We acknowledge our responsibility for ensuring that the financial statements are in accordance
with:

(a) the Companies Act, including: (i) giving a true and fair view of the [company/entity]’s
financial position as at [date] and of its performance for the year ended on that date; and
(ii) complying with International Accounting Standards (including the International
Accounting Interpretations) and
(b) other mandatory professional reporting requirements and confirm that the financial
statements are free of material misstatements, including omissions.

We confirm, to the best of our knowledge and belief, the following representations made to you
during your audit. [Include representations relevant to the entity. Such representations may
include the following examples.]

We have made available to you:

(a) all financial records and related data, other information, explanations and assistance
necessary for the conduct of the audit;
(b) minutes of all meetings of [shareholders, directors, committees of directors].

There:
(a) has been no fraud, error or non-compliance with laws and regulations involving
management or employees who have a significant role in internal control;
(b) has been no fraud, error or non-compliance with laws and regulations that could have a
material effect on the financial statements; and
(c) have been no communications from regulatory agencies concerning non-compliance
with, or deficiencies in, financial reporting practices that could have a material effect on
the financial statements.

We acknowledge our responsibility for the design and implementation of internal control to
prevent and detect error.
We have established and maintained adequate internal control to facilitate the preparation of a
reliable financial statements, and adequate financial records have been maintained.

There are no material transactions that have not been properly recorded in the accounting
records underlying the financial statements.
We believe the effects of those uncorrected financial statements misstatements aggregated by
the auditor during the audit are immaterial, both individually and in the aggregate, to the
financial statements taken as a whole.
We have no plans or intentions that may materially affect the carrying values, or classification,
of assets and liabilities.

The following have been properly recorded and/or disclosed in the financial statements:

(a) related party transactions and related amounts receivable or payable, including sales,
 purchases, loans, transfers, leasing arrangements and guarantees (written or oral);
(b) share options, warrants, conversions or other requirements;
(c) arrangements involving restrictions on cash balances, compensating balances and line-
of-credit or similar arrangements;
(d) agreements to repurchase assets previously sold;
(e) material liabilities or contingent liabilities or assets including those arising under
derivative financial instruments;
(f) unasserted claims or assessments that our lawyer has advised us are probable of
assertion; and (g) losses arising from the fulfillment of, or an inability to fulfill, any sale
commitments or as a result of purchase commitments for inventory quantities in excess
of normal requirements or at prices in excess of prevailing market prices.

There are no violations or possible violations of laws or regulations whose effects should be
considered for disclosure in the financial statements or as a basis for recording an expense.
The entity has satisfactory title to all assets, and there are no liens or encumbrances on such
assets nor has any asset been pledged as collateral.
Allowances for depreciation have been adjusted for all important items of property, plant and
equipment that have been abandoned or are otherwise unusable.
The entity has complied with all aspects of contractual agreements that would have a material
effect on the financial statements in the event of non-compliance.
There were no material commitments for construction or acquisition of property, plant and
equipment or to acquire other non-current assets, such as investments or intangibles, other than
those disclosed in the financial statements.
We have no plans to abandon lines of product or other plans or intentions that will result in any
excess or obsolete inventory, and no inventory is stated at an amount in excess of net realisable
value.
No events have occurred subsequent to the balance sheet date that would require adjustment
to, or disclosure in, the financial statements.
We understand that your examination was made in accordance with International Auditing
Standards and was, therefore, designed primarily for the purpose of expressing an opinion on
the financial statements of the entity taken as a whole, and that your tests of the financial
records and other auditing procedures were limited to those which you considered necessary for
that purpose.

Yours faithfully [Name of signing officer and title]

INTERNAL AUDIT: (ISA 610)

The external auditor shall consider the activities of internal audit and their effect, if any, on
external audit procedures.

Internal audit means an appraisal activity established within an entity as a service to the entity.
Its functions include, amongst other things, monitoring internal control.
While the external auditor has sole responsibility for the audit opinion expressed and for
determining the nature, timing and extent of external audit procedures, certain parts of internal
audit work may be useful to the external auditor.

The scope and objectives of internal audit:

The scope and objectives vary widely and depend on the size and structure of the entity and the
requirements of those charged with governance and management. Ordinarily, internal audit
activities include one or more of the following:

• Monitoring of internal control. The establishment of adequate internal control is a responsibility

of those charged with governance and management which demands proper attention on a
continuous basis. Internal audit is ordinarily assigned specific responsibility by those charged
with governance for reviewing controls, monitoring their operation and recommending
improvements thereto.
• Examination of financial and operating information. This may include review of the means used
to identify, measure, classify and report such information and specific enquiry into individual
items including detailed testing of transactions, balances and procedures.
• Review of the economy, efficiency and effectiveness of operations including non-financial
controls of an entity.
• Review of compliance with laws, regulations and other external requirements and with
management policies and directives and other internal requirements.

Relationship Between Internal Audit and the External Auditor:

The role of internal audit is determined by those charged with governance and management,
and its objectives differ from those of the external auditor who is appointed to report
independently on the financial statements. The internal audit function’s objectives vary
according to the requirements of those charged with governance and management.
The external auditor’s primary concern is whether the financial statements are free of material
misstatements and are prepared, in all material respects, in accordance with an applicable
financial reporting framework. Nevertheless some of the means of achieving their respective
objectives are often similar and thus certain aspects of internal audit may be useful in
determining the nature, timing and extent of external audit procedures.
Internal audit is part of the entity. Irrespective of the degree of autonomy and objectivity of
internal audit, it cannot achieve the same degree of independence as required of the external
auditor when expressing an opinion on the financial statements. The external auditor has sole
responsibility for the audit opinion expressed, and that responsibility is not reduced by any use
made of internal audit. All judgements relating to the audit of the financial statements are those
of the external auditor.

Reliance on Internal Audit:

The external auditor shall obtain a sufficient understanding of internal audit activities to identify
and assess the risks of material misstatement of the financial statements and to design and
perform further audit procedures. Effective internal audit will often allow a modification in the
nature and timing, and a reduction in the extent of audit procedures performed by the external
auditor but cannot eliminate them entirely.

The external auditor shall perform an assessment of the internal audit function when internal
audit is relevant to the external auditor’s risk assessment.

The external auditor’s assessment of the internal audit function will influence the external
auditor’s judgement about the use which may be made of internal audit in making risk
assessments and thereby modifying the nature, timing and extent of further external audit
procedures.

When obtaining an understanding and performing an assessment of the internal audit function,
the important criteria are ordinarily the following:

• Organisational status: Specific status of internal audit in the entity and the effect this has on its
ability to be objective. In the ideal situation, internal audit will report administratively to the
highest level of management and functionally to those charged with governance and be free of
any other operating responsibility. Any constraints or restrictions placed on internal audit by
management or those charged with governance would ordinarily be carefully considered. In
particular, the internal auditors will need to be free to communicate fully with the external
auditor.
• Scope of function: The nature and extent of internal audit assignments performed. The
external auditor would also ordinarily consider whether management and those charged with
governance act on internal audit recommendations and how this is evidenced.
• Technical competence: Whether internal audit is performed by persons having adequate
technical training and proficiency as internal auditors. The external auditor may, for example,
review the policies for hiring and training the internal audit staff and their experience and
professional qualifications.
• Due professional care: Whether internal audit is properly planned, supervised, reviewed and
documented. The existence of adequate audit manuals, work programs and working papers
would ordinarily be considered.

Evaluating the Work of Internal Audit:

When the external auditor intends to use specific work of internal audit, the external auditor shall
evaluate and perform audit procedures on that work to confirm its adequacy for the external
auditor’s purposes. The auditor needs to evaluate the specific work of internal audit which
involves consideration of the adequacy of the scope of work and related programs and whether
the assessment of the internal audit remains appropriate. This evaluation may include
consideration of whether:
• the work is performed by persons having adequate technical training and proficiency as
internal auditors and the work of assistants is properly supervised, reviewed and documented;
• sufficient appropriate audit evidence is obtained to be able to draw reasonable conclusions; •
conclusions reached are appropriate in the circumstances and any reports prepared are
consistent with the results of the work performed;
• identified issues and risks were reported to the relevant governance body; and
• any exceptions or unusual matters disclosed by internal audit are properly resolved. The
nature, timing and tent of the audit procedures performed on the specific work of internal audit
will depend on the external auditor’s judgement as to the risk of material misstatement of the
area concerned, the assessment of internal audit and the evaluation and observation of the
specific work by internal audit