HKSA 210 - Agreeing the Terms of Audit Engagements

HKSA 210 - Agreeing the Terms of Audit Engagements

INTRODUCTION

Scope of this HKSA (Paragraph 1)

This Hong Kong Standard on Auditing (HKSA) 210 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 are present. The responsibility for these preconditions rests with management and, where appropriate, those charged with governance.

Key Distinction:

HKSA 210 deals with preconditions within the control of the entity

HKSA 220 (Revised) deals with engagement acceptance aspects within the control of the auditor

Effective Date (Paragraph 2)

This HKSA is effective for audits of financial statements for periods beginning on or after 15 December 2009.

OBJECTIVE (Paragraph 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 (Paragraphs 4-5)

Preconditions for an Audit (Paragraph 4)

Definition: The use by management of an acceptable financial reporting framework in the preparation of the financial statements AND the agreement of management (and, where appropriate, those charged with governance) to the premise on which an audit is conducted.

Two Components:

Acceptable financial reporting framework

Agreement to the premise of the audit

Reference to Management (Paragraph 5)

For the purposes of this HKSA, references to "management" should be read as "management and, where appropriate, those charged with governance."

REQUIREMENTS

Preconditions for an Audit (Paragraph 6)

The auditor shall establish whether preconditions are present by:

(a) Determining whether the financial reporting framework to be applied is acceptable

Factors relevant to determining acceptability (A4):

The nature of the entity (business enterprise, public sector, not-for-profit)

The purpose of the financial statements (general purpose vs. special purpose)

The nature of the financial statements (complete set vs. single statement)

Whether law or regulation prescribes the applicable financial reporting framework

General Purpose Frameworks (A8):

Financial reporting standards established by authorized/recognized organizations are presumed acceptable if they follow an established and transparent process. Examples include:

IFRSs/HKFRSs (IASB/HKICPA)

IPSASs (IPSASB)

Accounting principles from authorized standards setting organizations

Frameworks Prescribed by Law or Regulation (A9):

In the absence of indications to the contrary, such frameworks are presumed acceptable.

(b) Obtaining the agreement of management that it acknowledges and understands its responsibility:

(i) For the preparation of the financial statements in accordance with the applicable financial reporting framework, including where relevant their fair presentation

Most frameworks include presentation requirements

Fair presentation frameworks require specific reference to "true and fair view"

(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

Important Note: Internal control, no matter how effective, can provide only reasonable assurance due to inherent limitations. The audit does not substitute for management's maintenance of internal control.

(iii) To provide the auditor with:

Requirement	Description
(a) Access to all information	Records, documentation, and other matters relevant to financial statement preparation
(b) Additional information	Any information the auditor may request for audit purposes
(c) Unrestricted access	Access to persons within the entity from whom the auditor needs audit evidence

Limitation on Scope Prior to Audit Engagement Acceptance (Paragraph 7)

Critical Rule: If management or those charged with governance impose a limitation on the scope of the auditor's work such that the auditor believes the limitation will result in disclaiming an opinion, the auditor shall NOT accept such a limited engagement as an audit engagement, unless required by law or regulation to do so.

Other Factors Affecting Audit Engagement Acceptance (Paragraph 8)

If preconditions are not present, the auditor shall discuss the matter with management. Unless required by law or regulation, the auditor shall NOT accept the proposed audit engagement if:

(a) The financial reporting framework is determined to be unacceptable (except as provided in paragraph 19); OR

(b) The agreement referred to in paragraph 6(b) has not been obtained

Agreement on Audit Engagement Terms (Paragraphs 9-12)

Agreeing the Terms (Paragraph 9)

The auditor shall agree the terms of the audit engagement with management or those charged with governance, as appropriate.

Recording in Engagement Letter (Paragraph 10)

Subject to paragraph 11, the agreed terms shall be recorded in an audit engagement letter or other suitable form of written agreement and shall include:

Required Element	Description
(a) Objective and scope	The objective and scope of the audit of the financial statements
(b) Auditor's responsibilities	The responsibilities of the auditor
(c) Management's responsibilities	The responsibilities of management
(d) Financial reporting framework	Identification of the applicable financial reporting framework
(e) Expected report form/content	Reference to the expected form and content of reports to be issued
(f) Possible report differences	Statement that circumstances may cause the report to differ from expected form/content

Additional Note for Corporate Practices: The engagement letter for a corporate practice shall identify the director appointed by the corporate practice to be responsible for the performance of the audit engagement.

When Law or Regulation Prescribes Terms (Paragraph 11)

If law or regulation prescribes in sufficient detail the terms of the audit engagement, the auditor need not record them in a written agreement, except for:

The fact that such law or regulation applies

That management acknowledges and understands its responsibilities as set out in paragraph 6(b)

Equivalent Responsibilities in Law/Regulation (Paragraph 12)

If law or regulation prescribes responsibilities of management similar to those in paragraph 6(b), the auditor may determine they are equivalent. For equivalent responsibilities, the auditor may use the wording of law or regulation. For non-equivalent responsibilities, the written agreement shall use the description in paragraph 6(b).

Recurring Audits (Paragraph 13)

Requirement: 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.

Factors that may make revision appropriate (A30):

Indication that the entity misunderstands the objective and scope of the audit

Revised or special terms of the audit engagement

Recent change of senior management

Significant change in ownership

Significant change in nature or size of the entity's business

Change in legal or regulatory requirements

Change in the financial reporting framework

Change in other reporting requirements

Acceptance of a Change in the Terms of the Audit Engagement (Paragraphs 14-17)

General Rule (Paragraph 14)

Critical Rule: The auditor shall NOT agree to a change in the terms of the audit engagement where there is no reasonable justification for doing so.

Reasonable Justification Examples (A32):

Change in circumstances affecting the entity's requirements

Misunderstanding concerning the nature of the service originally requested

Unreasonable Justification Examples (A33):

Change relates to information that is incorrect, incomplete, or otherwise unsatisfactory

Example: Auditor cannot obtain sufficient evidence on receivables, and entity requests change to review engagement to avoid qualified opinion

Change to Lower Level of Assurance (Paragraph 15)

If, prior to completing the audit engagement, the auditor is requested to change to an engagement that conveys a lower level of assurance, the auditor shall determine whether there is reasonable justification.

Additional Considerations for Change to Review or Related Service (A34-A35):

Assess legal or contractual implications

Work performed to date of change may be relevant to changed engagement

Report on related service shall NOT include reference to:

The original audit engagement

Any procedures performed in the original audit engagement (except for agreed-upon procedures)

Recording Changed Terms (Paragraph 16)

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

When Auditor Cannot Agree to Change (Paragraph 17)

If the auditor is unable to agree to a change and is not permitted to continue the original audit engagement, the auditor shall:

(a) Withdraw from the audit engagement where possible under applicable law or regulation

(b) Determine whether there is any obligation (contractual or otherwise) to report the circumstances to other parties (those charged with governance, owners, or regulators)

Hong Kong Specific Note: An auditor of a company incorporated under the Companies Ordinance who resigns or is removed must comply with sections 424 or 425 of the Companies Ordinance regarding the statement to be made in relation to resignation, removal, or retirement.

Additional Considerations in Engagement Acceptance (Paragraphs 18-21)

Financial Reporting Standards Supplemented by Law or Regulation (Paragraph 18)

If financial reporting standards are supplemented by law or regulation, the auditor shall determine whether there are any conflicts. If conflicts exist, the auditor shall discuss with management and 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 can be amended accordingly

If neither action is possible, the auditor shall determine whether it will be necessary to modify the auditor's opinion in accordance with HKSA 705 (Revised).

Financial Reporting Framework Prescribed by Law or Regulation - Other Matters (Paragraphs 19-20)

If the framework prescribed by law or regulation would be unacceptable but for the fact that it is prescribed (Paragraph 19):

The auditor shall accept the audit engagement only if BOTH conditions are present:

Condition	Description
(a) Management agrees to additional disclosures	Required to avoid the financial statements being misleading
(b) Terms of engagement recognize	(i) Auditor's report will include an Emphasis of Matter paragraph drawing attention to additional disclosures (HKSA 706 Revised)
	(ii) Unless required by law/regulation, the auditor's opinion will NOT include "present fairly, in all material respects" or "give a true and fair view"

If conditions are not present and auditor is required by law/regulation to undertake the audit (Paragraph 20):

(a) Evaluate the effect of the misleading nature of the financial statements on the auditor's report

(b) Include appropriate reference to this matter in the terms of the audit engagement

Auditor's Report Prescribed by Law or Regulation (Paragraph 21)

If law or regulation prescribes the layout or wording of the auditor's report in a form significantly different from HKSAs, the auditor shall evaluate:

(a) Whether users might misunderstand the assurance obtained; and if so

(b) Whether additional explanation in the auditor's report can mitigate possible misunderstanding

Critical Rule: If the auditor concludes that additional explanation 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 HKSAs, and the auditor shall NOT include any reference within the auditor's report to the audit having been conducted in accordance with HKSAs.

Conformity and Compliance with International Standards on Auditing (Paragraphs 22-23)

As of March 2025, this HKSA conforms with ISA 210

Compliance with this HKSA ensures compliance with ISA 210

Additional local guidance and explanations are provided in footnotes 2a, 2b, and 2c

An example audit engagement letter is provided in Appendix 1

APPLICATION AND OTHER EXPLANATORY MATERIAL

Scope of this HKSA (A1)

Key Point: HKSQM 1 deals with the firm's responsibilities regarding acceptance and continuance of client relationships. HKSA 220 (Revised) deals with ethical requirements and independence. HKSA 210 deals with matters (preconditions) within the control of the entity.

Preconditions for an Audit

The Financial Reporting Framework (A2-A10)

Criteria for Assurance Engagements (A2):

Suitable criteria enable reasonably consistent evaluation or measurement

The applicable financial reporting framework provides the criteria for auditing financial statements

Without an Acceptable Framework (A3):

Management lacks appropriate basis for preparation

Auditor lacks suitable criteria for auditing

General Purpose vs. Special Purpose (A5-A6):

General purpose: Meets common financial information needs of wide range of users

Special purpose: Meets financial information needs of specific users (HKSA 800 Revised)

Deficiencies After Acceptance (A7):

If framework is prescribed by law/regulation: paragraphs 19-20 apply

If not prescribed: management may adopt another acceptable framework, and new terms are agreed

Presumption of Acceptability (A8):

Financial reporting standards from authorized organizations following established, transparent processes are presumed acceptable.

Jurisdictions Without Standards Setting Organizations (A10):

Management identifies the framework. Appendix 2 provides guidance.

Agreement of Management Responsibilities (A11-A21)

Fundamental Premise (A11):

Audit is conducted on the premise that management acknowledges its responsibilities

The auditor's role does NOT involve taking responsibility for preparation of financial statements or internal control

Agreement is reached to avoid misunderstanding

Division of Responsibilities (A12):

Management: responsible for execution

Those charged with governance: oversight of management

In some cases, those charged with governance approve financial statements or monitor internal control

Written Representations (A13-A14):

HKSA 580 requires the auditor to request written representations

If management will not acknowledge responsibilities or provide written representations, the auditor will be unable to obtain sufficient appropriate audit evidence

It would not be appropriate to accept the engagement unless required by law or regulation

Internal Control Considerations (A16-A19):

Internal control provides only reasonable assurance due to inherent limitations

The audit does not substitute for management's maintenance of internal control

Management determines what internal control is necessary

Components include: control environment, risk assessment process, monitoring, information system, control activities

Additional Information (A20):

May include matters related to other information in accordance with HKSA 720 (Revised)

Terms may acknowledge auditor's responsibilities relating to other information obtained after the date of the auditor's report

Smaller Entities (A21):

Agreeing terms avoids misunderstanding about respective responsibilities

When a third party assists with preparation, remind management that responsibility remains with them

Agreement on Audit Engagement Terms

Agreeing the Terms (A22)

The roles of management and those charged with governance depend on the governance structure and relevant law or regulation.

Audit Engagement Letter (A23-A29)

Purpose (A23):

Sent before commencement of audit

Helps avoid misunderstandings

When law establishes terms sufficiently, paragraph 11 permits limited reference

Form and Content (A24):

May include reference to:

Elaboration of scope (legislation, regulations, HKSAs, ethical pronouncements)

Form of other communication of results

Requirement to communicate key audit matters (HKSA 701)

Inherent limitations of audit and internal control

Arrangements for planning and performance

Expectation of written representations

Access to information relevant to disclosures

Agreement to provide draft financial statements in time

Agreement to inform auditor of facts affecting financial statements

Fee computation and billing arrangements

Request for acknowledgment of receipt

Key Audit Matters (A25):

When not required to communicate key audit matters, it may be helpful to reference the possibility.

Additional Points (A26):

Involvement of other auditors and experts

Involvement of internal auditors

Arrangements with predecessor auditor

Responsibilities under law/regulation regarding non-compliance

Restriction of auditor's liability

Further agreements

Obligations to provide audit working papers

Audits of Components (A27):

Factors influencing separate engagement letters:

Who appoints the component auditor

Whether separate auditor's report is issued

Legal requirements

Degree of ownership by parent

Degree of independence of component management

Responsibilities Prescribed by Law or Regulation (A28-A29):

Written agreement still required per paragraph 11

May use wording of law/regulation if equivalent

Public sector: law/regulation may mandate appointment and set out responsibilities

Recurring Audits (A30)

The auditor may decide not to send a new engagement letter each period, but should consider factors that may make revision appropriate (listed above in paragraph 13 notes).

Acceptance of a Change in Terms (A31-A35)

Reasons for Request (A31):

Change in circumstances affecting need for service

Misunderstanding about nature of audit

Restriction on scope (by management or other circumstances)

Reasonable Basis (A32):

Change in circumstances affecting entity's requirements

Misunderstanding concerning nature of service

Unreasonable Basis (A33):

Change relates to information that is incorrect, incomplete, or otherwise unsatisfactory

Example: Avoiding qualified opinion by changing to review engagement

Change to Review or Related Service (A34-A35):

Assess legal or contractual implications

Work performed to date may be relevant

Report on related service shall NOT reference original audit engagement or procedures performed (except for agreed-upon procedures)

Additional Considerations (A36-A39)

Financial Reporting Standards Supplemented by Law or Regulation (A36):

Applicable framework encompasses both identified framework and additional requirements if no conflict

Example: Law prescribes additional disclosures or narrows acceptable choices

Framework Prescribed by Law or Regulation (A37):

When law prescribes "present fairly" or "true and fair view" wording but framework would otherwise be unacceptable

Terms of prescribed wording may be significantly different from HKSAs

Auditor's Report Prescribed by Law or Regulation (A38-A39):

Auditor shall not represent compliance with HKSAs unless all relevant HKSAs are complied with

If additional explanation cannot mitigate misunderstanding, consider including statement that audit is not conducted in accordance with HKSAs

Encouraged to apply HKSAs to extent practicable

Public sector: specific requirements may exist within legislation

APPENDIX 1: EXAMPLE OF AN AUDIT ENGAGEMENT LETTER

The appendix provides a comprehensive example of an audit engagement letter for a Hong Kong company incorporated under the Companies Ordinance (Cap. 622). Key sections include:

Objective of services - Confirms acceptance and understanding of the audit engagement

Responsibilities of directors - Eight specific responsibilities including preparation of financial statements, internal control, and providing access to information

Responsibilities of the auditor - Statutory and professional responsibilities including reporting requirements

Scope of audit - Detailed description of audit procedures and methodologies

Reporting - Reference to expected form and content of auditor's report

Other services - If applicable

Fees - Computation basis and billing arrangements

Agreement of terms - Confirmation and acceptance procedures

APPENDIX 2: DETERMINING THE ACCEPTABILITY OF GENERAL PURPOSE FRAMEWORKS

Jurisdictions Without Authorized Standards Setting Organizations

Common Practice:

Use financial reporting standards from organizations described in paragraph A8

Alternatively, use established accounting conventions in the jurisdiction

Determining Acceptability:

The auditor may consider whether accounting conventions exhibit attributes normally exhibited by acceptable financial reporting frameworks:

Attribute	Description
Relevance	Information is relevant to the nature of the entity and purpose of financial statements
Completeness	Transactions, events, account balances, and disclosures are not omitted
Reliability	Reflects economic substance, not merely legal form; results in consistent evaluation
Neutrality	Information is free from bias
Understandability	Information is clear, comprehensive, and not subject to significantly different interpretation

Comparison Approach:

Compare accounting conventions to existing acceptable framework (e.g., HKFRSs)

Consider reasons for differences

Determine whether application could result in misleading financial statements

Unacceptable Frameworks:

Conglomeration of accounting conventions devised to suit individual preferences

Compliance framework that is not generally accepted in the jurisdiction

KEY TAKEAWAYS SUMMARY TABLE

Topic	Key Requirement
Preconditions	Acceptable financial reporting framework + Management agreement to responsibilities
Management Responsibilities	(i) Prepare financial statements (ii) Maintain internal control (iii) Provide access, information, and unrestricted access
Scope Limitation	Do not accept if limitation would result in disclaimer of opinion
Engagement Letter	Must include objective/scope, responsibilities, framework, expected report, possible differences
Recurring Audits	Assess need for revision or reminder each period
Change in Terms	Do not agree without reasonable justification
Unacceptable Framework	Accept only if management agrees to additional disclosures and terms recognize Emphasis of Matter
Prescribed Report	Evaluate misunderstanding risk; do not accept if cannot mitigate
HKSAs Compliance	Do not reference HKSAs if audit does not comply