HKSA 210 - Agreeing the Terms of Audit Engagements (Condensed)
| Section | Key Concept | Brief Description |
|---|---|---|
| Scope & Objective | Preconditions & Common Understanding | Auditor must establish preconditions (acceptable framework + management agreement) and confirm mutual understanding of terms before accepting/continuing an audit. |
| Definitions | Preconditions for an Audit | Two components: (1) use of an acceptable financial reporting framework, and (2) managementโs agreement to the premise on which the audit is conducted. |
| Requirements โ Preconditions | Acceptable Framework & Management Responsibilities | Auditor determines framework acceptability (considering entity nature, purpose, etc.) and obtains managementโs agreement to prepare financial statements, maintain internal control, and provide access/information. |
| Requirements โ Engagement Terms | Engagement Letter & Recurring Audits | Terms must be recorded in an engagement letter (or equivalent) including objective, responsibilities, framework, and report form. Recurring audits require reassessment of need for revision. |
| Requirements โ Change in Terms | No Change Without Reasonable Justification | Auditor cannot agree to a change in terms without reasonable justification (e.g., change in circumstances, misunderstanding). If change is to a lower-assurance engagement, assess justification carefully. |
| Additional Considerations | Conflicts with Law/Regulation & Prescribed Reports | If framework is supplemented by law, resolve conflicts via additional disclosures or amended description. If prescribed report form differs from HKSAs, evaluate user misunderstanding risk. |
| Application Material | Explanatory Guidance on Preconditions & Terms | Provides detailed guidance on framework acceptability, management responsibilities (including internal control components), engagement letter content, and factors for recurring audits. |
Scope & Objective
Scope of 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.
- 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
Objective
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:
| Requirement | Description |
|---|---|
| (a) | Establishing whether the preconditions for an audit are present |
| (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 |
Effective Date
This HKSA is effective for audits of financial statements for periods beginning on or after 15 December 2009.
Definitions
Preconditions for an Audit
Two Components
| Component | Description |
|---|---|
| 1. Acceptable financial reporting framework | The framework used by management to prepare the financial statements must be acceptable. |
| 2. Agreement to the premise of the audit | Management must agree to the premise on which the audit is conducted. |
Reference to Management
For the purposes of this HKSA, references to 'management' should be read as 'management and, where appropriate, those charged with governance.'
Preconditions for an Audit
Establishing Preconditions
The auditor shall establish whether preconditions are present by:
| Requirement | Details |
|---|---|
| (a) Determine whether the financial reporting framework is acceptable | Factors: nature of entity, purpose of financial statements, nature of statements, whether law/regulation prescribes the framework. General purpose frameworks from authorized organizations are presumed acceptable. |
| (b) Obtain management's agreement to its responsibilities | Three key responsibilities: (i) prepare financial statements, (ii) maintain internal control, (iii) provide access, information, and unrestricted access to persons. |
Management Responsibilities โ Detailed
| Responsibility | Description |
|---|---|
| (i) Preparation of financial statements | In accordance with the applicable financial reporting framework, including fair presentation where relevant. |
| (ii) Internal control | Such internal control as management determines is necessary to enable preparation of financial statements free from material misstatement. |
| (iii) Provide the auditor with: | (a) Access to all information; (b) Additional information as requested; (c) Unrestricted access to persons within the entity. |
Limitation on Scope Prior to Acceptance
Other Factors Affecting Acceptance
If preconditions are not present, the auditor shall discuss with management. Unless required by law or regulation, the auditor shall NOT accept the proposed audit engagement if:
- The financial reporting framework is determined to be unacceptable (except as provided in paragraph 19); OR
- The agreement referred to in paragraph 6(b) has not been obtained
Agreement on Audit Engagement Terms
Agreeing the Terms
The auditor shall agree the terms of the audit engagement with management or those charged with governance, as appropriate.
Recording in Engagement Letter
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 |
When Law or Regulation Prescribes Terms
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)
Recurring Audits
Factors that may make revision appropriate include: indication of misunderstanding, revised terms, change of senior management, change in ownership, change in nature/size of business, change in legal/regulatory requirements, change in financial reporting framework, change in other reporting requirements.
Acceptance of a Change in Terms
General Rule
Reasonable vs. Unreasonable Justification
| Reasonable Justification | Unreasonable Justification |
|---|---|
| Change in circumstances affecting the entity's requirements | Change relates to information that is incorrect, incomplete, or otherwise unsatisfactory |
| Misunderstanding concerning the nature of the service originally requested | 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
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.
Recording Changed Terms
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
If the auditor is unable to agree to a change and is not permitted to continue the original audit engagement, the auditor shall:
| Action | Description |
|---|---|
| (a) Withdraw | Withdraw from the audit engagement where possible under applicable law or regulation |
| (b) Report | Determine whether there is any obligation (contractual or otherwise) to report the circumstances to other parties (those charged with governance, owners, or regulators) |
Additional Considerations in Engagement Acceptance
Financial Reporting Standards Supplemented by Law or Regulation
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:
| Option | Description |
|---|---|
| (a) Additional disclosures | The additional requirements can be met through additional disclosures in the financial statements |
| (b) Amend framework description | 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).
Unacceptable Framework Prescribed by Law or Regulation
If the framework prescribed by law or regulation would be unacceptable but for the fact that it is prescribed, 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; (ii) Unless required by law/regulation, the auditor's opinion will NOT include 'present fairly' or 'give a true and fair view' |
Auditor's Report Prescribed by Law or Regulation
Application and Other Explanatory Material
Scope of this HKSA
Preconditions for an Audit โ Financial Reporting Framework
| Topic | Guidance |
|---|---|
| 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 needs of wide range of users; special purpose meets needs of specific users. |
| Deficiencies After Acceptance (A7) | If framework is prescribed by law/regulation: paragraphs 19-20 apply. If not prescribed: management may adopt another acceptable framework. |
| Presumption of Acceptability (A8) | Financial reporting standards from authorized organizations following established, transparent processes are presumed acceptable. |
Agreement of Management Responsibilities
| Topic | Guidance |
|---|---|
| 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. |
| 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. |
| Internal Control Considerations (A16-A19) | Internal control provides only reasonable assurance due to inherent limitations. Components include: control environment, risk assessment process, monitoring, information system, control activities. |
Agreement on Audit Engagement Terms
The engagement letter may include reference to: elaboration of scope, form of other communication of results, requirement to communicate key audit matters, inherent limitations of audit and internal control, arrangements for planning and performance, expectation of written representations, access to information, fee computation and billing arrangements, and request for acknowledgment of receipt.
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.
Appendices & Key Takeaways
Appendices & Key Takeaways
Appendix 1: Example of an Audit Engagement Letter
Provides a comprehensive example for a Hong Kong company incorporated under the Companies Ordinance (Cap. 622). Key sections include:
| Section | Content |
|---|---|
| 1. Objective of services | Confirms acceptance and understanding of the audit engagement |
| 2. Responsibilities of directors | Eight specific responsibilities including preparation of financial statements, internal control, and providing access to information |
| 3. Responsibilities of the auditor | Statutory and professional responsibilities including reporting requirements |
| 4. Scope of audit | Detailed description of audit procedures and methodologies |
| 5. Reporting | Reference to expected form and content of auditor's report |
| 6. Other services | If applicable |
| 7. Fees | Computation basis and billing arrangements |
| 8. Agreement of terms | Confirmation and acceptance procedures |
Appendix 2: Determining the Acceptability of General Purpose Frameworks
In jurisdictions without authorized standards setting organizations, 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 |
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 |
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