SA 210*

AGREEING THE TERMS OF AUDIT

ENGAGEMENTS
(Effective for all audits relating to
accounting periods beginning on or after April 1, 2010)

Contents
Paragraph(s)

Introduction
Scope of this SA............... ........................................................................ 1
Effective Date............................................................................................ 2
Objective .................................................................................................. 3
Definitions ............................................................................................ 4-5
Requirements
Preconditions for an Audit ..................................................................... 6-8
Agreement on Audit Engagement Terms ........................................... 9-12
Recurring Audits ..................................................................................... 13
Acceptance of a Change in the Terms of the Audit Engagement ..... 14-17
Additional Considerations in Engagement Acceptance ..................... 18-21
Application and Other Explanatory Material
Scope of this SA .....................................................................................A1
Preconditions for an Audit .............................................................. A2-A19
Agreement on Audit Engagement Terms .................................... A20-A26
Recurring Audits ...................................................................................A27
Acceptance of a Change in the Terms of the Audit Engagement A28-A32
Additional Considerations in Engagement Acceptance ............... A33-A36

*Published in September, 2009 issue of the Journal.

Handbook of Auditing Pronouncements-I.A

Material Modifications to ISA 210, “Agreeing the Terms of Audit

Engagements”
Appendix 1: Example of an Audit Engagement Letter
Appendix 2: Determining the Acceptability of General Purpose
Frameworks
Standard on Auditing (SA) 210, “Agreeing the Terms of Audit Engagements”
should be read in the context of the “Preface to the Standards on Quality Control,
Auditing, Review, Other Assurance and Related Services1,” which sets out the
authority of SAs and SA 200, “Overall Objectives of the Independent Auditor and
the Conduct of an Audit in Accordance with Standards on Auditing”2.

1 Published in the July, 2007 issue of the Journal.

2 Published in the March, 2010 issue of the Journal.

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 Agreeing the Terms of Audit Engagements

Introduction
Scope of this SA
1. This Standard on Auditing (SA) 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. SA 220 3
deals with those aspects of engagement acceptance that are within the control of
the auditor. (Ref: Para. A1)
Effective Date
2. This SA is effective for audits of financial statements for periods beginning
on or after April 1, 2010.
Objective
3. The objective of the auditor is to accept or continue an audit engagement
only when the basis upon which it is to be performed has been agreed, through:
(a) Establishing whether the preconditions for an audit are present; and
(b) Confirming that there is a common understanding between the auditor and
management and, where appropriate, those charged with governance of
the terms of the audit engagement.
Definitions
4. For purposes of the SAs, the following term has the meaning attributed
below:
Preconditions for an audit – The use by management of an acceptable financial
reporting framework4 in the preparation of the financial statements and the
agreement of management and, where appropriate, those charged with
governance to the premise5 on which an audit is conducted.
5. For the purposes of this SA, references to “management” should be read
hereafter as “management and, where appropriate, those charged with governance”.

3 SA 220, “Quality Control for an Audit of Financial Statements”, published in March, 2010 issue of
the Journal.
4 SA 200, “Overall Objectives of the Independent Auditor and the Conduct of an Audit in

accordance with Standards on Auditing”, paragraph 13 (a).

5 SA 200, Paragraph 13 (j).

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Requirements
Preconditions for an Audit
6. In order to establish whether the preconditions for an audit are present,
the auditor shall:
(a) Determine whether the financial reporting framework to be applied in the
preparation of the financial statements is acceptable; and (Ref: Para. A2-
A9)
(b) Obtain the agreement of management that it acknowledges and
understands its responsibility: (Ref: Para A10-A13, A19)
(i) For the preparation of the financial statements in accordance with the
applicable financial reporting framework, including where relevant
their fair presentation; (Ref: Para. A14)
(ii) 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; and (Ref: Para.
A15-A18)
(iii) To provide the auditor with:
a. 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;
b. Additional information that the auditor may request from
management for the purpose of the audit; and
c. Unrestricted access to persons within the entity from whom the
auditor determines it necessary to obtain audit evidence.
Limitation on Scope Prior to Audit Engagement Acceptance
7. If management or those charged with governance impose a limitation on
the scope of the auditor’s work in the terms of a proposed audit engagement
such that 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.

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 Agreeing the Terms of Audit Engagements

Other Factors Affecting Audit Engagement Acceptance

8. If the preconditions for an audit are not present, the auditor shall discuss
the matter with management. Unless required by law or regulation to do so, the
auditor shall not accept the proposed audit engagement:
(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; or
(b) If the agreement referred to in paragraph 6(b) has not been obtained.
Agreement on Audit Engagement Terms
9. The auditor shall agree the terms of the audit engagement with
management or those charged with governance, as appropriate. (Ref: Para. A20)
10. Subject to paragraph 11, 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: (Ref: Para. A21-A24)
(a) The objective and scope of the audit of the financial statements;
(b) The responsibilities of the auditor;
(c) The responsibilities of management;
(d) Identification of the applicable financial reporting framework for the
preparation of the financial statements; and
(e) 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.
11. If law or regulation prescribes in sufficient detail the terms of the audit
engagement referred to in paragraph 10, the auditor need not record them in a
written agreement, except for the fact that such law or regulation applies and that
management acknowledges and understands its responsibilities as set out in
paragraph 6(b). (Ref: Para. A21, A25-A26)

12. If law or regulation prescribes responsibilities of management similar to

those described in paragraph 6(b), the auditor may determine that the law or
regulation includes responsibilities that, in the auditor’s judgment, are equivalent

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in effect to those set out in that paragraph. For such responsibilities that are
equivalent, the auditor may use the wording of the law or regulation to describe
them in the written agreement. For those responsibilities that are not prescribed
by law or regulation such that their effect is equivalent, the written agreement
shall use the description in paragraph 6(b). (Ref: Para. A25)
Recurring Audits
13. On recurring audits, the auditor shall assess whether circumstances
require the terms of the audit engagement to be revised and whether there is a
need to remind the entity of the existing terms of the audit engagement. (Ref:
Para. A27)
Acceptance of a Change in the Terms of the Audit Engagement
14. The auditor shall not agree to a change in the terms of the audit
engagement where there is no reasonable justification for doing so. (Ref: Para.
A28-A30)

15. 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, the auditor shall determine whether there is reasonable justification
for doing so. (Ref: Para. A31-A32)

16. If the terms of the audit engagement are changed, the auditor and
management shall agree on and record the new terms of the engagement in an
engagement letter or other suitable form of written agreement.

17. If the auditor is unable to agree to a change of the terms of the audit
engagement and is not permitted by management to continue the original audit
engagement, the auditor shall:
(a) Withdraw from the audit engagement where possible under applicable law
or regulation; and
(b) 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.

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 Agreeing the Terms of Audit Engagements

Additional Considerations in Engagement Acceptance

Financial Reporting Standards6 Supplemented by Law or Regulation
18. If financial reporting standards established by an authorised or recognised
standards setting organization are supplemented by law or 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:
(a) The additional requirements can be met through additional disclosures in
the financial statements; or
(b) The description of the applicable financial reporting framework in the
financial statements can be amended accordingly.
If neither of the above actions is possible, the auditor shall determine whether it
will be necessary to modify the auditor’s opinion in accordance with SA 7057.
(Ref: Para. A33)
Financial Reporting Framework Prescribed by Law or Regulation—Other
Matters Affecting Acceptance
19. If the auditor has determined that the financial reporting framework
prescribed by law or regulation would be unacceptable but for the fact that it is
prescribed by law or regulation, the auditor shall accept the audit engagement
only if the following conditions are present: (Ref: Para. A34)
(a) Management agrees to provide additional disclosures in the financial
statements required to avoid the financial statements being misleading; and
(b) It is recognised in the terms of the audit engagement that:
(i) 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 SA 7068 ; and
(ii) Unless the auditor is required by law or regulation to express the

6 Accounting Standards issued by the ICAI or Accounting Standards, notified by the Central
Government by publishing the same as the Companies (Accounting Standards) Rules, 2006, or the
Accounting Standards for Local Bodies issued by the ICAI, as may be applicable.
7 Standard on Auditing (SA) 705, “Modifications to the Opinion in the Independent Auditor’s

Report”; published in February, 2010 issue of the Journal.

8 Standard on Auditing (SA) 706, “Emphasis of Matter Paragraphs and Other Matter Paragraphs in

the Independent Auditor’s Report”, published in February, 2010 issue of the Journal.

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auditor’s opinion on the financial statements by using the phrases

“present fairly, in all material respects”, or “give a true and fair view” in
accordance with the applicable financial reporting framework, the
auditor’s opinion on the financial statements will not include such
phrases.
20. If the conditions outlined in paragraph 19 are not present and the auditor
is required by law or regulation to undertake the audit engagement, the auditor
shall:

(a) Evaluate the effect of the misleading nature of the financial statements on
the auditor’s report; and
(b) Include appropriate reference to this matter in the terms of the audit
engagement.
Auditor’s Report Prescribed by Law or Regulation
21. In some cases, the law or regulation applicable to the entity prescribes the
layout or wording of the auditor’s report in a form or in terms that are significantly
different from the requirements of SAs. In these circumstances, the auditor shall
evaluate:
(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
misunderstanding9.

If the auditor concludes that additional explanation in the auditor’s report cannot
mitigate possible misunderstanding, the auditor shall not accept the audit
engagement, unless required by law or regulation to do so. An audit conducted in
accordance with such law or regulation does not comply with SAs. Accordingly,
the auditor shall not include any reference within the auditor’s report to the audit
having been conducted in accordance with SAs10. (Ref: Para. A35-A36)
***

9 SA 706.
10 SA 700, “Forming an Opinion and Reporting on Financial Statements”, paragraph 43.

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 Agreeing the Terms of Audit Engagements

Application and Other Explanatory Material

Scope of this SA (Ref: Para. 1)
A1. 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 characteristics11. The auditor’s responsibilities in
respect of ethical requirements in the context of the acceptance of an audit
engagement and in so far as they are within the control of the auditor are dealt
with in SA 22012. This SA 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.
Preconditions for an Audit
The Financial Reporting Framework (Ref: Para. 6(a))
A2. A condition for acceptance of an assurance engagement is that the criteria
referred to in the definition of an assurance engagement are suitable and
available to intended users13. Criteria are the benchmarks used to evaluate or
measure the subject matter including, where relevant, benchmarks for
presentation and disclosure. Suitable criteria enable reasonably consistent
evaluation or measurement of a subject matter within the context of professional
judgment. For purposes of the SAs, the applicable financial reporting framework
provides the criteria the auditor uses to audit the financial statements, including
where relevant their fair presentation.
A3. Without an acceptable financial reporting framework, management does not
have an appropriate basis for the preparation of the financial statements and the
auditor does not have suitable criteria for auditing the financial statements. In
many cases the auditor may presume that the applicable financial reporting
framework is acceptable, as described in paragraphs A8-A9.
Determining the Acceptability of the Financial Reporting Framework
A4. Factors that are relevant to the auditor’s determination of the acceptability
of the financial reporting framework to be applied in the preparation of the
financial statements include:

11 “Framework for Assurance Engagements,” paragraph 16.

12 SA 220, “Quality Control for an Audit of Financial Statements”, paragraphs 9-11.
13 “Framework for Assurance Engagements,” paragraph 16(b)(ii).

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● The nature of the entity (for example, whether it is a business enterprise, or

a not for profit organization);
● The purpose of the financial statements (for example, whether they are
prepared to meet the common financial information needs of a wide range
of users or the financial information needs of specific users);
● The nature of the financial statements (for example, whether the financial
statements are a complete set of financial statements or a single financial
statement); and
● Whether law or regulation prescribes the applicable financial reporting
framework.
A5. Many users of financial statements are not in a position to demand financial
statements tailored to meet their specific information needs. While all the
information needs of specific users cannot be met, there are financial information
needs that are common to a wide range of users. Financial statements prepared
in accordance with a financial reporting framework designed to meet the
common financial information needs of a wide range of users are referred to as
general purpose financial statements.
A6. In some cases, the financial statements will be prepared in accordance with
a financial reporting framework designed to meet the financial information needs
of specific users. Such financial statements are referred to as special purpose
financial statements. The financial information needs of the intended users will
determine the applicable financial reporting framework in these circumstances.
SA 800 discusses the acceptability of financial reporting frameworks designed to
meet the financial information needs of specific users.14
A7. Deficiencies in the applicable financial reporting framework that indicate
that the framework is not acceptable may be encountered after the audit
engagement has been accepted. When use of that framework is prescribed by
law or regulation, the requirements of paragraphs 19-20 apply. When use of that
framework is not prescribed by law or regulation, management may decide to
adopt another framework that is acceptable. When management does so, as
required by paragraph 16, new terms of the audit engagement are agreed to
reflect the change in the framework as the previously agreed terms will no longer
be accurate.

14 Standard on Auditing (SA) 800, “Special Considerations-Audits of Financial Statements

Prepared in Accordance with Special Purpose Framework”, paragraph 8.

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 Agreeing the Terms of Audit Engagements

General purpose frameworks

A8. At present, there is no objective and authoritative basis that has been
generally recognised globally for judging the acceptability of general purpose
frameworks. In the absence of such a basis, financial reporting standards
established by organizations that are authorised or recognised to promulgate
standards to be used by certain types of entities are presumed to be acceptable
for general purpose financial statements prepared by such entities, provided the
organizations follow an established and transparent process involving
deliberation and consideration of the views of a wide range of stakeholders.
Examples of such financial reporting standards include:
 Accounting Standards issued by the Institute of Chartered Accountants of
India (ICAI) and/ or Accounting Standards, notified by the Central
Government by publishing the same as the Companies (Accounting
Standards) Rules, 2006, as may be applicable;
 Accounting Standards for Local Bodies issued by the Institute of Chartered
Accountants of India (ICAI);
 International Financial Reporting Standards (IFRSs) issued by the
International Accounting Standards Board; and
 International Public Sector Accounting Standards (IPSASs) issued by the
International Public Sector Accounting Standards Board.
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.
Financial reporting frameworks prescribed by law or regulation
A9. 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. Appendix 2 contains guidance on
determining the acceptability of the financial reporting framework. In case of
some entities, law or regulation may prescribe the financial reporting framework
to be used in the preparation of general purpose financial statements. 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. In the event that the framework is not considered to be acceptable,
paragraphs 19-20 apply.

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Agreement of the Responsibilities of Management (Ref: Para. 6(b))

A10. An audit in accordance with SAs is conducted on the premise that
management has acknowledged and understands that it has the responsibilities
set out in paragraph 6(b)15. In case of certain entities, such responsibilities may
be specified in the applicable law or regulation. In others, there may be little or no
legal or regulatory definition of such responsibilities. SAs 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.
Accordingly, the premise is fundamental to the conduct of an independent audit.
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.
A11. 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. 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.
A12. SA 580 requires the auditor to request management to provide written
representations that it has fulfilled certain of its responsibilities16. 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 SAs 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.
A13. Where management will not acknowledge its responsibilities, or agree to

15 SA 200, Paragraph A2.

16 SA 580, “Written Representations,” paragraphs 10-11.

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 Agreeing the Terms of Audit Engagements

provide the written representations, the auditor will be unable to obtain sufficient
appropriate audit evidence17. 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. 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.
Preparation of the Financial Statements (Ref: Para. 6(b)(i))
A14. 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, or to
the responsibility to ensure that the financial statements will “give a true and fair
view” in accordance with the financial reporting framework.
Internal Control (Ref: Para. 6(b)(ii))
A15. 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
control18.
A16. An independent audit conducted in accordance with the SAs 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. However, 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.
A17. It is for management to determine what internal control is necessary to
enable the preparation of the financial statements. The term “internal control”

17SA 580, paragraph A26.

18SA 315, “Identifying and Assessing the Risks of Material Misstatement Through Understanding the
Entity and Its Environment,” paragraph A46.

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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.19 An entity’s internal control (in particular, its accounting
books and records, or accounting systems) 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.
A18. In some cases, law or regulation may refer to the responsibility of
management for the adequacy of accounting books and records, or accounting
systems. In some other 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. As 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. To avoid misunderstanding,
it may be appropriate for the auditor to explain to management the scope of this
responsibility.
Considerations Relevant to Smaller Entities (Ref: Para. 6(b))
A19. One of the purposes of agreeing the terms of the audit engagement is to
avoid misunderstanding about the respective responsibilities of management and
the auditor. For example, when a third party has assisted with the preparation of
the financial statements, it may be useful to remind management that the
preparation of the financial statements in accordance with the applicable financial
reporting framework remains its responsibility.
Agreement on Audit Engagement Terms
Agreeing the Terms of the Audit Engagement (Ref: Para. 9)
A20. The roles of management and those charged with governance in agreeing
the terms of the audit engagement for the entity depend on the governance
structure of the entity and relevant law or regulation.

19 SA 315, paragraph A51 and Appendix 1.

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 Agreeing the Terms of Audit Engagements

Audit Engagement Letter or Other Form of Written Agreement20 (Ref: Para. 10-
11)
A21. 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. In some entities, however, the
objective and scope of an audit and the responsibilities of management and of
the auditor may be sufficiently established by law, that is, they prescribe the
matters described in paragraph 10. Although in these circumstances paragraph
11 permits the auditor to include in the engagement letter only reference to the
fact that relevant law or regulation applies and that management acknowledges
and understands its responsibilities as set out in paragraph 6(b), the auditor may
nevertheless consider it appropriate to include the matters described in
paragraph 10 in an engagement letter for the information of management.
Form and Content of the Audit Engagement Letter
A22. 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 SA 20021. Paragraphs 6(b) and 12 of this SA
deal with the description of the responsibilities of management. In addition to
including the matters required by paragraph 10, an audit engagement letter may
make reference to, for example:
● Elaboration of the scope of the audit, including reference to applicable
legislation, regulations, SAs, and ethical and other pronouncements of
professional bodies to which the auditor adheres.
● The form of any other communication of results of the audit engagement.
● The fact that because of the inherent limitations of an audit, together with
the inherent limitations of internal control, there is an unavoidable risk that
some material misstatements may not be detected, even though the audit
is properly planned and performed in accordance with SAs.
● Arrangements regarding the planning and performance of the audit,
including the composition of the audit team.
● The expectation that management will provide written representations (see
also paragraph A13).

20 In the paragraphs that follow, any reference to an audit engagement letter is to be taken as a
reference to an audit engagement letter or other suitable form of written agreement.
21 SA 200, paragraph 3-9.

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● The agreement of management to make available to the auditor draft

financial statements and any accompanying other information in time to
allow the auditor to complete the audit in accordance with the proposed
timetable.
● The agreement of management to inform the auditor of facts that may 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.
● 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 outlined therein.
● The fact that the audit process may be subjected to a peer review under the
Chartered Accountants Act, 1949.
A23. When relevant, the following points could also be made in the audit
engagement letter:
● Arrangements concerning the involvement of other auditors and experts in
some aspects of the audit.
● Arrangements 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 provide audit working papers to other parties.
An example of an audit engagement letter is set out in Appendix 1.
Audits of Components
A24. 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;

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 Agreeing the Terms of Audit Engagements

● Legal requirements in relation to audit appointments;

● Degree of ownership by parent; and
● Degree of independence of the component management from the parent
entity.
Responsibilities of Management Prescribed by Law or Regulation (Ref: Para. 11-
12)
A25. If, in the circumstances described in paragraphs A22 and A27, the auditor
concludes that it is not necessary to record certain terms of the audit
engagement in an audit engagement letter, the auditor is still required by
paragraph 11 to seek the written agreement from management that it
acknowledges and understands that it has the responsibilities set out in
paragraph 6(b). However, in accordance with paragraph 12, such written
agreement may use the wording of the law or regulation if such law or regulation
establishes responsibilities for management that are equivalent in effect to those
described in paragraph 6(b).
A26. In case of certain entities, such as, Central/State governments and related
government entities (for example, agencies, boards, commissions), law or
regulation governing the operations of that entities generally mandate the
appointment of the auditor and commonly set out the auditor’s responsibilities
and powers, including the power to access an entity’s records and other
information. When law or regulation prescribes in sufficient detail the terms of the
audit engagement, the auditor may nonetheless consider that there are benefits
in issuing a fuller audit engagement letter than permitted by paragraph 11.
Recurring Audits (Ref: Para. 13)
A27. The auditor may decide not to send a new audit engagement letter or other
written agreement each period. However, 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 significant change in ownership.
● A significant change in nature or size of the entity’s business.

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● 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.
Acceptance of a Change in the Terms of the Audit Engagement
Request to Change the Terms of the Audit Engagement (Ref: Para. 14)
A28. A request from the entity for the auditor to change the terms of the audit
engagement may result from a change in circumstances affecting the need for
the service, a misunderstanding as to the nature of an audit as originally
requested or a restriction on the scope of the audit engagement, whether
imposed by management or caused by other circumstances. The auditor, as
required by paragraph 14, considers the justification given for the request,
particularly the implications of a restriction on the scope of the audit engagement.
A29. A change in circumstances that affects the entity’s requirements or a
misunderstanding concerning the nature of the service originally requested may
be considered a reasonable basis for requesting a change in the audit
engagement.
A30. In contrast, a change may not be considered reasonable if it appears that
the change relates to information that is incorrect, incomplete or otherwise
unsatisfactory. An example might be where the auditor is unable to obtain
sufficient appropriate audit evidence regarding receivables and the entity asks for
the audit engagement to be changed to a review engagement to avoid a qualified
opinion or a disclaimer of opinion.
Request to Change to a Review or a Related Service (Ref: Para. 15)
A31. Before agreeing to change an audit engagement to a review or a related
service, an auditor who was engaged to perform an audit in accordance with SAs
may need to assess, in addition to the matters referred to in paragraphs A29-A31
above, any legal or contractual implications of the change.
A32. If the auditor concludes that there is reasonable justification to change the
audit engagement to a review or a related service, the audit work performed to
the date of change may be relevant to the changed engagement; however, the
work required to be performed and the report to be issued would be those
appropriate to the revised engagement. In order to avoid confusing the reader,
the report on the related service would not include reference to:
(a) The original audit engagement; or
SA 210 18
 Agreeing the Terms of Audit Engagements

(b) Any procedures that may have been performed in the original audit
engagement, except where the audit engagement is changed to an engagement
to undertake agreed- upon procedures and thus reference to the procedures
performed is a normal part of the report.
Additional Considerations in Engagement Acceptance
Financial Reporting Standards Supplemented by Law or Regulation (Ref: Para.
18)
A33. In case of some entities, law or regulation may supplement the financial
reporting standards established by an authorised or recognised standards setting
organization with additional requirements relating to the preparation of financial
statements. In such cases, the applicable financial reporting framework for the
purposes of applying the SAs encompasses both the identified financial reporting
framework and such additional requirements provided they do not conflict with
the identified financial reporting framework. This may, for example, be the case
when law or regulation prescribes disclosures in addition to those required by the
financial reporting standards or when they narrow the range of acceptable
choices that can be made within the financial reporting standards22.
Financial Reporting Framework Prescribed by Law or Regulation—Other Matters
Affecting Acceptance (Ref: Para. 19)
A34. Law or regulation may prescribe that the wording of the auditor’s opinion
use the phrases “present fairly, in all material respects” or “give a true and fair
view” in a case where the auditor concludes that the applicable financial
reporting framework prescribed by law or regulation would otherwise have been
unacceptable. In this case, the terms of the prescribed wording of the auditor’s
report are significantly different from the requirements of SAs (see paragraph
21).
Auditor’s Report Prescribed by Law or Regulation (Ref: Para. 21)
A35. SAs require that the auditor shall not represent compliance with SAs unless
the auditor has complied with all of the SAs relevant to the audit23. When law or
regulation prescribes the layout or wording of the auditor’s report in a form or in
terms that are significantly different from the requirements of SAs and the auditor
concludes that additional explanation in the auditor’s report cannot mitigate
possible misunderstanding, the auditor may consider including a statement in the

22 SA 700, “Forming an Opinion and Reporting on Financial Statements”, paragraph 15.

23 SA 200, paragraph 20.

19 SA 210
Handbook of Auditing Pronouncements-I.A

auditor’s report that the audit is not conducted in accordance with SAs. The
auditor is, however, encouraged to apply SAs, including the SAs that address the
auditor’s report, to the extent practicable, notwithstanding that the auditor is not
permitted to refer to the audit being conducted in accordance with SAs.
A36. In case of certain entities, such as, Central/State governments and related
government entities (for example, agencies, boards, commissions), specific
requirements may exist within the legislation governing the audit mandate; for
example, the auditor may be required to report directly to a regulator or the
legislative body or the stakeholders if the entity attempts to limit the scope of the
audit.
Material Modifications to ISA 210, “Agreeing the Terms of
Audit Engagements”
Addition
Paragraph A8 of ISA 210 provides the examples of the financial reporting
standards, which can be used for the preparation and presentation of general
purpose financial statements. Since in India, financial reporting standards, used
for the preparation and presentation of financial statements, can be ‘Accounting
Standards issued by the Institute of Chartered Accountants of India or
Accounting Standards, notified under Companies (Accounting Standards) Rules,
2006’ or ‘Accounting Standards for Local Bodies issued by the Institute of
Chartered Accountants of India (ICAI)’, these have been added in the list of
examples of financial reporting standards. References have accordingly been
changed.
Deletions
1. Paragraph A10 of the ISA 210 deals with situations where the entity
operates in a jurisdiction that does not have a standard setting organization or a
prescribed financial reporting framework. Since in India, this kind of situation
does not exist, paragraph A10 has been deleted. However, the reference to
Appendix 2, Determining Acceptability of General Purpose Frameworks, has
been shifted to paragraph A9.
2. Paragraph A27 of ISA 210 deals with the condition where the law or
regulation governs the operations of public sector audits, and also prescribes the
public sector auditor’s responsibilities and powers. Paragraph A37 of ISA 210
deals with the specific reporting requirements within the legislation governing the
audit which may mandate; for example, the auditor may be required to report

SA 210 20
 Agreeing the Terms of Audit Engagements

directly to a minister or the legislature or to public if the entity attempts to limit the
scope of the audit in case of public sector entities. Since as mentioned in the
“Preface to the Standards on Quality Control, Auditing, Review, Other Assurance
and Related Services”, the Standards issued by the Auditing and Assurance
Standards Board, apply equally to all entities, irrespective of their form, nature
and size, a specific reference to applicability of the Standard to public sector
entities has been deleted. However, since it is also possible that such situations
may also exist in case of certain non-public entities pursuant to a requirement
under the statute or regulation under which they operate the spirit of erstwhile
A27 and A37 has been retained.

21 SA 210
Handbook of Auditing Pronouncements-I.A

Appendix 1
(Ref: Paras. A22-A23)
Example of an Audit Engagement Letter
The following is an example of an audit engagement letter for an audit of general
purpose financial statements prepared in accordance with Financial Reporting
Standards24 of a company registered under the Companies Act, 1956. This letter is
not authoritative but is intended only to be a guide that may be used in conjunction
with the considerations outlined in this SA. It will need to be varied according to
individual requirements and circumstances. It is drafted to refer to the audit of
financial statements for a single reporting period and would require adaptation if
intended or expected to apply to recurring audits (see paragraph 13 of this SA). It
may be appropriate to seek legal advice that any proposed letter is suitable.
***
To the Board of Directors of ABC Company Limited:25
[The objective and scope of the audit]
You26 have requested that we audit the financial statements of ABC Company
Limited, which comprise the Balance Sheet as at March 31, 20X1, and the
Statement of Profit & Loss, and Cash Flow Statement for the year then ended,
and a summary of significant accounting policies and other explanatory
information. We are pleased to confirm our acceptance and our understanding of
this audit engagement by means of this letter. Our audit will be conducted with
the objective of our expressing an opinion on the financial statements. 27

24 Refer footnote 6.
25 The addressees and references in the letter would be those that are appropriate in the
circumstances of the engagement, including the relevant jurisdiction. It is important to refer to the
appropriate persons – see paragraph A21.
26 Throughout this letter, references to “you”, “we”, “us”, “management”, “those charged with

governance” and “auditor” would be used or amended as appropriate in the circumstances.

27 Where the financial statements of the entity include financial statements/ information of its

component(s) which have been audited by another auditor/ auditors, the engagement letter may be
modified as under:
“You have requested that we audit the financial statements of ABC Company Limited,
which comprise the Balance Sheet as at March 31, 20X1, and the Statement of Profit &
Loss, and Cash Flow Statement for the year then ended, and a summary of significant
accounting policies and other explanatory information. We are pleased to confirm our
acceptance and our understanding of this audit engagement by means of this letter. Our
audit will be conducted with the objective of our expressing an opinion on the financial
statements.
Further, as informed by you, the financial statements of the components of ABC Company Limited,
viz., PQR Company Limited and XYZ Company Pvt Limited, whose financial information/ financial
statements have been included in the financial statements of ABC Company would be/ have been

SA 210 22
 Agreeing the Terms of Audit Engagements

[The responsibilities of the auditor]

We will conduct our audit in accordance with Standards on Auditing (SAs),
issued by the Institute of Chartered Accountants of India (ICAI). Those Standards
require that we comply with ethical requirements and plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
from material misstatement. An audit involves performing procedures to obtain
audit evidence about the amounts and disclosures in the financial statements.
The procedures selected depend on the auditor’s judgment, 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 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 inherent limitations of an audit, together with the inherent
limitations of internal control, there is an unavoidable risk that some material
misstatements may not be detected, even though the audit is properly planned
and performed in accordance with SAs.
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 will communicate to you in writing concerning any significant
deficiencies in internal control relevant to the audit of the financial statements
that we have identified during the audit.
[The responsibilities of management and identification of the applicable financial
reporting framework (for purposes of this example it is assumed that the auditor
has determined that the provisions of the Companies Act, 1956 relating to
responsibility of the Board of Directors be supplemented by the descriptions in
paragraph 6(b) of this SA).]
Our audit will be conducted on the basis that [management and, where
appropriate, those charged with governance]28 acknowledge and understand that
they have responsibility:
(a) For the preparation of financial statements that give a true and fair view in
accordance with the Financial Reporting Standards.29 This includes:

audited by another auditor/ auditors. However, we expect to be furnished the reports of such other
auditor(s) before the date of our audit report so as to enable us to deal with such reports in
accordance with the principles enunciated in the Standard on Auditing (SA) 600, Using the Work of
Another Auditor, issued by the Institute of Chartered Accountants of India”.
28 Use terminology as appropriate in the circumstances.
29 Or, if appropriate, “For the preparation and fair presentation of the financial statements in

accordance with the Financial Reporting Standards”.

23 SA 210
Handbook of Auditing Pronouncements-I.A

 the responsibility for the preparation of financial statements on a going

concern basis.
 the responsible for selection and consistent application of appropriate
accounting policies, including implementation of applicable accounting
standards along with proper explanation relating to any material
departures from those accounting standards.
 The responsibility for making judgements and estimates that are
reasonable and prudent so as to give a true and fair view of the state of
affairs of the entity at the end of the financial year and of the profit or
loss of the entity for that period.
(b) 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; and
(c) To provide us with:
(i) Access, at all times, to all information, including the books, account,
vouchers and other records and documentation, of the Company,
whether kept at the head office of the company or elsewhere, of which
[management] is aware that is relevant to the preparation of the
financial statements such as records, documentation and other
matters;
(ii) Additional information that we may request from [management] for the
purpose of the audit; and
(iii) Unrestricted access to persons within the entity from whom we
determine it necessary to obtain audit evidence. This includes our
entitlement to require from the officers of the Company such
information and explanations as we may think necessary for the
performance of our duties as auditor.
As part of our audit process, we will request from [management and, where
appropriate, those charged with governance], written confirmation concerning
representations made to us in connection with the audit.
We also wish to invite your attention to the fact that our audit process is subject
to 'peer review' under the Chartered Accountants Act, 1949 to be conducted by
an Independent reviewer. The reviewer may inspect, examine or take abstract of
our working papers during the course of the peer review.
We look forward to full cooperation from your staff during our audit.
[Other relevant information]

SA 210 24
 Agreeing the Terms of Audit Engagements

[Insert other information, such as fee arrangements, billings30 and other specific
terms, as appropriate.]
[Reporting]
[Insert appropriate reference to the expected form and content of the auditor’s
report.]
The form and content of our report may need to be amended in the light of our
audit findings.
Please sign and return the attached copy of this letter to indicate your
acknowledgement of, and agreement with, the arrangements for our audit of the
financial statements including our respective responsibilities.
XYZ & Co.
Chartered Accountants
Firm’s Registration Number

(Signature)
Date : (Name of the Member)
Place : (Designation31)
Acknowledged on behalf of ABC Company by

(Signature)
Name and Designation
Date

30 For example, “Our fees will be billed as the work progresses”.

31 Partner or proprietor, as the case may be.

25 SA 210
Handbook of Auditing Pronouncements-I.A

Appendix 2
(Ref: Para. A9)
Determining the Acceptability of General Purpose
Frameworks
1. Acceptable financial reporting frameworks normally exhibit the following
attributes that result in information provided in financial statements that is useful
to the intended users:
(a) Relevance, in that the information provided in the financial statements is
relevant to the nature of the entity and the purpose of the financial
statements. For example, in the case of a business enterprise that prepares
general purpose financial statements, relevance is assessed in terms of the
information necessary to meet the common financial information needs of a
wide range of users in making economic decisions. These needs are
ordinarily met by presenting the financial position, financial performance
and cash flows of the business enterprise.
(b) Completeness, in that transactions and events, account balances and
disclosures that could affect conclusions based on the financial statements
are not omitted.
(c) Reliability, in that the information provided in the financial statements:
(i) Where applicable, reflects the economic substance of events and
transactions and not merely their legal form; and
(ii) Results in reasonably consistent evaluation, measurement,
presentation and disclosure, when used in similar circumstances.
(d) Neutrality, in that it contributes to information in the financial statements
that is free from bias.
(e) Understandability, in that the information in the financial statements is clear
and comprehensive and not subject to significantly different interpretation.
2. The auditor may decide to compare the accounting conventions to the
requirements of an existing financial reporting framework considered to be
acceptable. For example, the auditor may compare the accounting conventions
to IFRSs. For an audit of a small entity, the auditor may decide to compare the
accounting conventions to a financial reporting framework specifically developed
for such entities by an authorised or recognised standards setting organization.

SA 210 26
 Agreeing the Terms of Audit Engagements

When the auditor makes such a comparison and differences are identified, the
decision as to whether the accounting conventions adopted in the preparation
and presentation of the financial statements constitute an acceptable financial
reporting framework includes considering the reasons for the differences and
whether application of the accounting conventions, or the description of the
financial reporting framework in the financial statements, could result in financial
statements that are misleading.
3. A conglomeration of accounting conventions devised to suit individual
preferences is not an acceptable financial reporting framework for general
purpose financial statements. Similarly, a compliance framework will not be an
acceptable financial reporting framework, unless it is generally accepted in the
industry to which the entity belongs by preparers and users.

27 SA 210