KnS School of Business Studies

ACCA F8 & CA CAF 9 (Audit & Assurance)

Practice Questions - ISA 210 Engagement Letter (excluding Pre-conditions)

Index of
Practice Questions

S No Question Attempt Marks Page No

1 Q.2 (a) (b) ACCA September/December 2015 (5 marks) 1–3

2 Q.2 (b) ACCA June 2011 (4 marks) 4–5

3 Q.4 (b) ACCA December 2013 (2 marks) 6–7

Compiled By M. Sajid Kapadia (ACA, FCCA, APFA)

ACCA September/December 2015 (5 marks)
Question 2 (a) (b)

ISA 210 Agreeing the Terms of Audit Engagements requires auditors to agree the terms of an
engagement with those charged with governance and formalize these is an engagement letter.

Required:
a) Identify and explain TWO factors which would indicate that an engagement letter for an
existing audit client should be revised. (2 marks)

b) List SIX matters which should be included within an audit engagement letter. (3 marks)

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Answer 2:
a) Engagement letters
Engagement letters for recurring/existing clients should be revised if any of the following
factors are present:
- Any indication that the entity misunderstands the objective and scope of the audit, as this
misunderstanding would need to be clarified.
- Any revised or special terms of the audit engagement, as these would require inclusion in the
engagement letter.
- A recent change of senior management or significant change in ownership. The letter is signed
by a director on behalf of those charged with governance; if there have been significant changes
in management they need to be made aware of what the audit engagement letter includes.
- A significant change in nature or size of the entity’s business. The approach taken by the
auditor may need to change to reflect the change in the entity and this should be clarified in
the engagement letter.
- A change in legal or regulatory requirements. The engagement letter is contract; hence if legal
or regulatory changes occur, then the contract could be out of date.
- A change in the financial reporting framework adopted in the preparation of the financial
statements. The engagement letter clarifies the role of auditors and those charged with
governance, it identifies the reporting framework of the financial statements and if his change,
then the letter requires updating.
- A change in other reporting requirements. Other reporting requirements may be stipulated in
the engagement letter; hence if these change, the letter should be updated.

b) Matters to be included in an audit engagement letter

- The objective and scope of the audit;
- The responsibilities of the auditor;
- The responsibilities of management;
- Identification of the financial reporting framework for the preparation of the financial
statements;
- Expected from and content of any reports to be issued;
- Elaboration of the scope of the audit with reference to legislation;
- The form of any other communication of results of the audit engagement;
- The fact that some material misstatements may not be detected;
- Arrangements regarding the planning and performance of the audit, including the composition
of the audit team;
- The expectation that management will provide written representations;
- The basis on which fees are computed and any billing arrangements;
- A request for management to acknowledge receipt of the audit engagement letter and to agree
to the terms of the agreement;

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- Arrangements concerning the involvement of internal auditors and other staff of the entity;
- Any obligations to provided audit working papers to other parties;
- Any restriction on the auditor’s liability;
- Arrangements to make available draft financial statements and any other information;
- Arrangements to inform the auditor of facts which might affect the financial statements, of
which management may become aware during the period from the date of the auditor’s report
to the date the financial statements are issued.

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ACCA June 2011 (4 marks)
Question 2 (b)
ISA 210 Agreeing the Terms of Audit Engagements provides guidance on the content of
engagement letters and deals with the auditor’s responsibilities in agreeing the terms of the audit
engagement with management.

Required:
i. State the purpose of an engagement letter. (1 mark)
ii. List SIX matters that should be included within an audit engagement letter. (3 marks)

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 Answer 2 (b):
i. Purpose of an engagement letter
An engagement letter provides a written agreement of the terms of the audit engagement
between the auditor and management or those changed with governance.
Confirming that there is a common understanding between the auditor and management, or
those charged with governance, of the terms of the audit engagement helps to avoid
misunderstandings with respect to the audit.

ii. Matters to be included in an audit engagement letter:

- The objective and scope of the audit;
- The responsibilities of the auditor;
- The responsibilities of the management;
- Identification of the financial reporting framework for the preparation of the financial
statement;
- Expected form and content of any reports to be issued;
- Elaboration of the scope of the audit with reference to legislation;
- The form of any other communication of results of the audit engagement;
- The fact that some material misstatements may not be detected;
- Arrangements regarding the planning and performance of the audit, including the composition
of the audit team;
- The expectation that management will provide written representations;
- The basis on which fees are computed and any billing arrangements;
- A request for management to acknowledge receipt of the audit engagement letter and to agree
to the terms of the engagement;
- Arrangements concerning the involvement of internal auditors and other staff of the entity;
- Any obligations to provide audit working papers to other parties;
- Any restriction on the other liability;
- Arrangement to make available draft financial statements and any other information;
- Arrangements to inform the auditors of facts that might affect the financial statements, of
which management may become aware during the period from the date of the auditor’s, report
to the date the financial statements are issued.

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ACCA December 2013 (2 marks)
Question 4 (b)
Salt & Pepper & Co (Salt & Pepper) is a firm of Chartered Certified Accountants which has seen
its revenue decline steadily over the past few years. The firm is looking to increase its revenue and
client base and so has developed a new advertising strategy where it has guaranteed that its audit
will minimize disruption to companies as they will not last longer than two weeks.in addition, Salt
& Pepper has offered all new audit client a free accounts preparation service for the first year of
the engagement, as it is believed that time spent on the audit will be reduced if the firm has
produced the financial statements.

The firm is seeking to reduce audit costs and has therefore decided not to update the engagement
letter of existing clients, on the basis that these letters do not tend to change much on a yearly
basis. One of Salt & Pepper’s existing clients has proposed that this year’s audit fee should be
based on a percentage of their final pre-tax profit. The partners are excited about this option as
they believe it will increase the overall audit fee.

Salt & Pepper has recently obtained a new audit client, Cinnamon Brothers Co (Cinnamon),
whose year end is 31 December. Cinnamon requires their audit to be completed by the end of
February; however, this is a very busy time for Salt & Pepper and so it is intended to use more
junior staff as they are available. Additionally, in order to save time and cost, Salt & Pepper have
not contacted Cinnamon’s previous auditors.

Required:
b) State FOUR matters that should be included within an audit engagement letter.
(2 marks)

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Answer 4 (b):
Engagement letters
Matters to be included in an audit engagement letter:
- The objective and the scope of the audit;
- The responsibilities of the auditor;
- The responsibilities of the management;
- Identification of the financial reporting framework for the preparation of the financial
statements;
- Expected form and content of any reports to be issued;
- Elaboration of the scope of the audit with reference to legislation;
- The form of any other communication of results of the audit engagement;
- The fact that some material misstatements may not be detected;
- Arrangements regarding the planning and performance of the audit, including the
composition of the audit team;
- The expectation that management will provide written representations;
- The basis on which fees are computed and any billing arrangements;
- A request for management to acknowledge receipt of the audit engagement letter and to agree
to the terms of the engagement;
- Arrangements concerning the involvement of internal auditors and other staff of the entity;
- Any obligations to provide audit working papers to other parties;
- Any restrictions on the auditor’s liability; and
- Arrangements to make available draft financial statements and any other information.

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