What are the preconditions in relation to the acceptance of new audit engagements?

Preconditions for an Audit ensuring the presence and course of action

The directors of a company are in the process of appointing the first statutory auditor of the company. They have requested your firm to submit a proposal for the statutory audit assignment. A partner of your firm has asked you to draft the proposal after assessing whether the preconditions for the audit exist.

Required:

(a) Briefly discuss the term ‘preconditions for an audit’.

(b) What are the steps that you would perform in order to ensure that preconditions for the audit exist?

(c) Discuss whether your firm may or may not accept the assignment if one of the preconditions for the audit is not present.

Preconditions for an audit

• An acceptable financial reporting framework has been used by the management in the preparation of the financial statements; and
• the management and, where appropriate, those charged with governance agreed on the premise on which the audit is to be conducted.

Ensuring the presence of ‘‘Preconditions for an audit’’

In order to establish whether the preconditions for an audit are present, we will:
determine whether the financial reporting framework to be applied in the preparation of financial statements is acceptable;
obtain the agreement of management that it acknowledges and understands its responsibility:

• for the preparation of the financial statements in accordance with the applicable financial reporting framework.
• 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.
• to provide us with access to all information of which management is aware, that may be relevant to the preparation of the financial statements;
• additional information that the auditor may request from management for the purpose of the audit; and
• unrestricted access to persons within the entity from whom the auditor determine it necessary to obtain audit evidence.

Course of Action if Precondition for an audit not present:

If a precondition for an audit is not present, the matter would be discussed with the management. Unless required by law or regulation to do so, we will not accept the proposed audit engagement, if the pre-conditions are not met.However, if the financial reporting framework is prescribed by law or regulation and it would have been unacceptable but for the fact that it is prescribed by law or regulation, the audit engagement will be accepted only if the following conditions are met:

(i)  Management agrees to provide additional disclosures in the financial statements to avoid the financial statements being misleading;
(ii) It is recognized in the terms of the audit engagement that:

• Our report on the financial statements will incorporate an Emphasis of Matter paragraph, drawing users’ attention to the additional disclosures.
• Our opinion on the financial statements will not include such phrases as “present fairly, in all material respects,” or “give a true and fair view” unless it is expressively required to be stated under the law or regulation.

If the above conditions are not present and still we are required by law or regulation to undertake the audit engagement, we shall:

• evaluate the effect of the misleading nature of the financial statements on report;
• include appropriate reference to this matter in the terms of the audit engagement.

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