Ethics and Terms of Audit Engagements - Test 4: answer key

Question 1 · 2 marks · Chapter 11: Ethics and Terms of Audit Engagements · medium

Scenario. M/s Sharma & Associates has been approached by Meridian Agro Exports Pvt. Ltd., a first-time audit client seeking examined financial statements for a consortium-bank facility. The company prepares monthly management accounts using an internally designed cash-realisation framework. It records customer receipts and supplier payments but omits significant trade receivables, accrued expenses and depreciation. Management says that the board has approved this framework and that the bank is interested only in cash flows. The engagement partner has not yet evaluated whether the framework is acceptable for the financial statements to undergo statutory audit or whether it meets the information needs of the intended users. The managing director agrees that the company will prepare the statements but insists that the auditor should design and operate the company's internal controls because the accounts team is inexperienced. He also refuses to acknowledge responsibility for preventing and detecting material misstatements. The controller offers access to the trial balance and selected invoices but will not provide the full purchase register, contracts, bank statements or additional schedules that the auditor may request. The controller further states that only the CFO may answer audit questions and that depot managers and sales staff cannot be approached directly. The company has already granted the audit firm a purchase order and expects fieldwork to begin next week. No engagement letter has been issued or signed. The managing director argues that the bank's appointment letter is enough and that the audit firm should start work first, resolving disagreements about responsibility and access later. The engagement partner must decide whether the preconditions for an audit exist, whether management has accepted the premise on which an audit is conducted, and what action is required before accepting the proposed engagement.

Before accepting Meridian's proposed audit, what should the engagement partner conclude regarding the company's internally designed cash-realisation framework?

1. Determine whether the framework is acceptable, considering the nature of the entity, purpose of the statements and information needs of intended users. (correct answer)
2. Accept the framework because it has been approved by the board and the consortium bank has not objected to its use.
3. Accept the framework provided management agrees to include the cash-flow statement and selected explanatory notes.
4. Defer consideration of the framework until substantive audit procedures establish whether the reported cash balances are genuine.

Answer: A — Determine whether the framework is acceptable, considering the nature of the entity, purpose of the statements and information needs of intended users.

Explanation. SA 210, paragraph 6(a) and paragraphs A2–A9, requires the auditor to determine whether the financial reporting framework to be applied is acceptable. Relevant considerations include the nature of the entity, purpose of the financial statements, their nature and whether the framework is prescribed by law or regulation. Board approval or a lender's preference does not automatically establish acceptability. A framework omitting material accruals and depreciation requires careful assessment before acceptance.

Where it goes wrong. Assuming that management's approval or the intended lender's acceptance automatically makes any internally designed financial reporting framework acceptable.

Authority. SA 210

Question 2 · 2 marks · Chapter 11: Ethics and Terms of Audit Engagements · hard

The managing director argues that the auditor should assume responsibility for designing and operating internal controls because the company's accounting department lacks experience. Which statement correctly applies SA 210?

1. The auditor should accept responsibility for controls because management may transfer operational responsibilities through an engagement letter.
2. The auditor should design controls but allow management to approve them before the financial statements are finalised.
3. Management must acknowledge responsibility for such internal control as it considers necessary to enable preparation of financial statements free from material misstatement. (correct answer)
4. Management may disclaim responsibility for internal controls provided that the auditor agrees to perform additional substantive procedures.

Answer: C — Management must acknowledge responsibility for such internal control as it considers necessary to enable preparation of financial statements free from material misstatement.

Explanation. SA 210, paragraph 6(b)(ii), requires management to acknowledge responsibility for such internal control as it considers necessary to enable preparation of financial statements free from material misstatement, whether due to fraud or error. The auditor's responsibility to understand controls and design appropriate audit procedures does not transfer management's responsibility. Additional substantive procedures cannot substitute for the required management acknowledgement.

Where it goes wrong. Confusing the auditor's responsibility to understand and evaluate relevant controls with management's responsibility for establishing necessary internal controls.

Authority. SA 210

Question 3 · 2 marks · Chapter 11: Ethics and Terms of Audit Engagements · medium

Which of the following correctly describes the access that management must acknowledge providing to the auditor?

1. Access to records selected by management, provided that the auditor receives written explanations for unavailable records.
2. Access to accounting records only, because direct communication with operational employees falls outside audit preconditions.
3. Access to records and documents but not additional information requested after the engagement letter has been signed.
4. Access to relevant information, additional information requested by the auditor and unrestricted access to persons from whom audit evidence is considered necessary. (correct answer)

Answer: D — Access to relevant information, additional information requested by the auditor and unrestricted access to persons from whom audit evidence is considered necessary.

Explanation. SA 210, paragraph 6(b)(iii), requires management to acknowledge its responsibility to provide access to all relevant information of which it is aware, additional information requested by the auditor and unrestricted access to persons within the entity from whom the auditor determines it necessary to obtain evidence. Management cannot restrict communication exclusively to the CFO. A selective document-access arrangement does not satisfy the required premise of an audit.

Where it goes wrong. Interpreting management's obligation as limited to supplying accounting records while ignoring additional information and unrestricted access to relevant personnel.

Authority. SA 210

Question 4 · 2 marks · Chapter 11: Ethics and Terms of Audit Engagements · hard

Assume Meridian refuses to acknowledge the management responsibilities specified under SA 210. What should the auditor do before accepting the proposed engagement?

1. Accept the engagement after obtaining the bank's written confirmation that it will rely on the auditor's report.
2. Discuss the matter with management and ordinarily not accept the engagement unless required by law or regulation to do so. (correct answer)
3. Accept the engagement after transferring responsibility for financial statement preparation to the company's CFO.
4. Commence fieldwork and obtain the required acknowledgement after the audit report has been substantially completed.

Answer: B — Discuss the matter with management and ordinarily not accept the engagement unless required by law or regulation to do so.

Explanation. SA 210, paragraph 8, requires the auditor to discuss the absence of preconditions with management. Unless required by law or regulation, the auditor shall not accept the proposed engagement if the framework is unacceptable or management's acknowledgement under paragraph 6(b) has not been obtained. A bank's willingness to rely on the report does not eliminate this requirement. Acceptance followed by delayed acknowledgement would reverse the prescribed sequence.

Where it goes wrong. Assuming that a commercial requirement or third-party approval can compensate for the absence of the essential preconditions for an audit.

Authority. SA 210

Question 5 · 2 marks · Chapter 11: Ethics and Terms of Audit Engagements · medium

Scenario. M/s K. Mehta & Co. has examined under statutory audit Zenith Components Ltd. for the last four financial years. The company recently acquired a competing manufacturer, replaced its CFO and expanded from domestic production into overseas contract manufacturing. The board has also decided to prepare a separate set of financial statements for a new class of lenders using a different financial reporting framework. The existing audit engagement letter refers only to the company's earlier domestic operations and the previous framework. The new CFO says the letter need not be revisited because the firm has examined under statutory audit the company for several years. During planning, the engagement partner notices that management believes the audit is intended to certify that every transaction is genuine and that no fraud can remain undetected. The CFO also expects the auditor to prepare the financial statements and reconcile the acquired company's ledgers because its accounting team has not yet been integrated. The partner explains that management remains responsible for preparing the statements and maintaining the internal control it considers necessary. The company asks the auditor to confirm the expected form of report before the audit starts and insists that any report must be unmodified because the lender's facility requires it. The firm has not yet agreed with management how the separate lender statements will be examined under statutory audit or whether they fall within the existing engagement. The partner must consider the effect of the ownership, management, business and framework changes, clarify the objective and scope of the audit, document management's and the auditor's responsibilities, and avoid creating an impression that the audit guarantees a predetermined outcome.

Which action should M/s K. Mehta & Co. take in relation to the recurring audit given the significant changes in ownership, management, business and financial reporting framework?

1. Retain the original engagement terms because recurring audits do not permit changes after the first year.
2. Issue a new engagement letter every year irrespective of whether any relevant circumstances have changed.
3. Assess whether the circumstances require revision of the engagement terms or a reminder of the existing terms to management. (correct answer)
4. Revise only the engagement fee because changes in ownership and financial reporting framework do not affect audit terms.

Answer: C — Assess whether the circumstances require revision of the engagement terms or a reminder of the existing terms to management.

Explanation. SA 210, paragraph 13 and paragraph A27, require the auditor in recurring audits to assess whether circumstances require revision of the engagement terms or a reminder of existing terms. Relevant factors expressly include recent changes in senior management, significant changes in ownership, changes in the nature or size of business and changes in the financial reporting framework. A fresh letter is not automatically necessary every year, but these circumstances require evaluation.

Where it goes wrong. Treating recurring audits as automatically exempt from reviewing engagement terms or assuming that a fresh letter is compulsory for every period.

Authority. SA 210

Question 6 · 2 marks · Chapter 11: Ethics and Terms of Audit Engagements · hard

Which combination of matters should be documented in the engagement letter for the newly proposed audit of Zenith's lender-specific financial statements?

1. The audit fee, the planned completion date and a guarantee that the auditor will issue an unmodified opinion if management cooperates.
2. The audit procedures selected, sampling percentages, every significant ledger balance and management's approval of audit adjustments.
3. The expected audit opinion, management's proposed accounting estimates and the auditor's undertaking to prepare the financial statements.
4. The audit objective and scope, auditor and management responsibilities, applicable financial reporting framework and expected report form and content with a qualification that the report may differ. (correct answer)

Answer: D — The audit objective and scope, auditor and management responsibilities, applicable financial reporting framework and expected report form and content with a qualification that the report may differ.

Explanation. SA 210, paragraph 10(a)–(e), specifies the principal contents of an audit engagement letter. These include the objective and scope of the audit, responsibilities of the auditor and management, identification of the applicable financial reporting framework and reference to the expected form and content of reports, together with a statement that circumstances may require a different report. The letter does not guarantee an unmodified opinion or transfer financial statement preparation to the auditor.

Where it goes wrong. Confusing the expected form of the auditor's report with a predetermined audit opinion or assuming that the engagement letter must contain every detailed audit procedure.

Authority. SA 210

Question 7 · 2 marks · Chapter 11: Ethics and Terms of Audit Engagements · medium

Management believes that the audit engagement letter must guarantee that no fraud will remain undetected and that the report will be unmodified. Which statement should the auditor clarify?

1. The auditor guarantees detection of every fraud where management provides access to all accounting records.
2. An unmodified report is assured whenever the applicable financial reporting framework has been identified correctly.
3. The auditor accepts responsibility for preparing the financial statements and preventing all material misstatements.
4. The audit provides reasonable assurance, not a guarantee, and the report's actual form and content may differ in light of audit findings. (correct answer)

Answer: D — The audit provides reasonable assurance, not a guarantee, and the report's actual form and content may differ in light of audit findings.

Explanation. SA 210, paragraph 10(e), requires the engagement terms to refer to the expected form and content of reports and acknowledge that circumstances may cause the report to differ. The illustrative engagement letter in Chapter 11 also explains that an audit provides reasonable assurance rather than a guarantee that every material misstatement will be detected. Management's expectations cannot turn the audit into an absolute assurance engagement or guarantee an unmodified opinion.

Where it goes wrong. Equating the expected form of the report with an assurance that the auditor will issue a predetermined opinion or detect every possible misstatement.

Authority. SA 210

Question 8 · 2 marks · Chapter 11: Ethics and Terms of Audit Engagements · hard

Suppose applicable law prescribes management responsibilities equivalent to those described in SA 210, paragraph 6(b), for preparing the financial statements and providing access to records. How may the auditor describe these responsibilities in the engagement documentation?

1. Omit management responsibilities entirely because equivalent responsibilities are already covered by the statutory appointment.
2. Use the wording of applicable law for responsibilities that are equivalent in effect, and describe any remaining responsibilities using paragraph 6(b). (correct answer)
3. Replace all management responsibilities with the auditor's statutory duties, irrespective of whether the law covers equivalent responsibilities.
4. Include only responsibilities expressly approved by the audit committee, because statutory wording cannot be used in an engagement agreement.

Answer: B — Use the wording of applicable law for responsibilities that are equivalent in effect, and describe any remaining responsibilities using paragraph 6(b).

Explanation. SA 210, paragraph 12 and paragraph A25, permit the auditor to use the wording of law or regulation where the prescribed responsibilities are equivalent in effect to those specified in paragraph 6(b). For responsibilities not prescribed with equivalent effect, the written agreement must use the description in paragraph 6(b). Statutory recognition therefore does not automatically remove every management responsibility from the engagement documentation.

Where it goes wrong. Confusing the statutory recognition of management responsibilities with a complete exemption from describing responsibilities not covered by equivalent legal provisions.

Authority. SA 210

Question 9 · 2 marks · Chapter 11: Ethics and Terms of Audit Engagements · medium

Scenario. M/s V. Raman & LLP is conducting the audit of Suryodaya Sugar Mills Ltd. for the year ended 31 March. After the engagement was accepted, the auditor requested third-party confirmations and supporting contracts for receivables of ₹18 crore arising from exports to two overseas distributors. Management has not supplied several shipping documents, subsequent-receipt evidence or reconciliation statements. It says that some documents are held by a logistics agent and that the agent is not permitted to communicate with the auditor. The CFO offers a management representation that all receivables are genuine but refuses to authorise further enquiries. The audit team considers the possible effect on the audit opinion. The company then asks the firm to replace the audit with a review engagement, arguing that a review will avoid a modified audit opinion and allow the company to meet its lender's reporting deadline. There has been no change in the company's financing needs, intended users or original understanding of the requested service. The request arises only after the auditor identified the missing evidence. Management adds that if the firm refuses, it will not permit the auditor to continue the original audit. The engagement partner considers whether there is reasonable justification for the requested change, whether any legal or contractual implications arise from changing to a lower-assurance engagement, and whether work already performed can be used for the revised service. The partner must also decide what the report on any revised engagement may refer to and what steps are required if the original audit cannot continue. The circumstances require the auditor to distinguish a genuine change in service requirements from an attempt to avoid the consequences of incomplete audit evidence.

Suppose the limitation imposed by Suryodaya's management had been included in the proposed audit terms before acceptance and the auditor believed that it would necessarily result in a disclaimer of opinion. What should the auditor do?

1. Accept the engagement and issue a disclaimer automatically without evaluating the reason for the imposed limitation.
2. Accept the engagement after obtaining management representation that the missing evidence is not material.
3. Accept the engagement because the auditor can always convert a limitation into a qualification after fieldwork.
4. Not accept the proposed limited audit engagement unless required to undertake it by law or regulation. (correct answer)

Answer: D — Not accept the proposed limited audit engagement unless required to undertake it by law or regulation.

Explanation. SA 210, paragraph 7, deals specifically with a limitation on scope imposed in the terms of a proposed audit engagement. Where the auditor believes that the limitation would result in a disclaimer of opinion, the auditor shall not accept the engagement as an audit unless required by law or regulation. This is different from a scope limitation encountered after acceptance, which requires consideration under the relevant reporting standards.

Where it goes wrong. Applying the rules for an unavoidable scope limitation discovered during an audit to a restriction already imposed in the proposed engagement terms.

Authority. SA 210

Question 10 · 2 marks · Chapter 11: Ethics and Terms of Audit Engagements · hard

Management requests that the audit be replaced with a review solely because sufficient appropriate evidence relating to material receivables is unavailable. What should the engagement partner conclude?

1. The requested change lacks reasonable justification because it arises from incomplete or unsatisfactory information and is intended to avoid a modified audit opinion. (correct answer)
2. The request is reasonable because management may select a lower level of assurance whenever the audit evidence becomes difficult to obtain.
3. The request is reasonable because a review engagement automatically removes the auditor's responsibility to consider the missing receivable evidence.
4. The auditor must accept the request because a review engagement involves fewer procedures than a statutory audit.

Answer: A — The requested change lacks reasonable justification because it arises from incomplete or unsatisfactory information and is intended to avoid a modified audit opinion.

Explanation. SA 210, paragraphs 14 and 15, read with paragraph A30, provides that an auditor shall not agree to a change without reasonable justification. An inability to obtain sufficient appropriate evidence concerning receivables followed by a request for a review to avoid a qualified opinion or disclaimer is specifically identified as an example of an unreasonable change. Reduced assurance is not a mechanism for avoiding the consequences of incomplete evidence.

Where it goes wrong. Assuming that management can convert an audit into a review merely because the auditor has encountered evidence difficulties.

Authority. SA 210

Question 11 · 2 marks · Chapter 11: Ethics and Terms of Audit Engagements · medium

Consider a different situation in which a company initially requests an audit for a proposed bank facility but subsequently decides not to seek that facility and requests a compilation engagement instead. Which statement is most appropriate?

1. The auditor must refuse because an engagement originally accepted as an audit can never be changed.
2. The changed circumstances may constitute reasonable justification, subject to assessment of the service requirements and relevant legal or contractual implications. (correct answer)
3. The auditor must retain the original audit terms but issue a compilation report after completing the audit procedures.
4. The auditor may change the engagement without informing management because the commercial purpose of the audit has disappeared.

Answer: B — The changed circumstances may constitute reasonable justification, subject to assessment of the service requirements and relevant legal or contractual implications.

Explanation. SA 210, paragraph 14 and paragraphs A28–A29, recognise a change in circumstances affecting the entity's need for the service or a misunderstanding of the original service as possible reasonable bases for changing engagement terms. Unlike a request driven by incomplete or unsatisfactory audit evidence, a genuine change in the entity's requirements may justify the change. The auditor must still determine the appropriate revised terms and reporting requirements.

Where it goes wrong. Confusing a genuine change in the client's service requirements with an attempt to avoid an adverse consequence of audit evidence.

Authority. SA 210

Question 12 · 2 marks · Chapter 11: Ethics and Terms of Audit Engagements · hard

If the engagement partner refuses to convert the audit into a review and management does not permit the original audit to continue, what should the auditor do?

1. Issue the review report using the audit procedures already performed without obtaining agreement on changed terms.
2. Continue the original audit regardless of management's refusal and issue an opinion using only the information already available.
3. Withdraw where permitted by applicable law or regulation and determine whether there is an obligation to report the circumstances to other parties. (correct answer)
4. Immediately issue a disclaimer of opinion without considering withdrawal or any reporting obligations arising from the circumstances.

Answer: C — Withdraw where permitted by applicable law or regulation and determine whether there is an obligation to report the circumstances to other parties.

Explanation. SA 210, paragraph 17, prescribes the auditor's recourse where the auditor cannot agree to a change in engagement terms and management does not permit continuation of the original audit. The auditor shall withdraw where possible under applicable law or regulation and determine whether there is a contractual or other obligation to report the circumstances to those charged with governance, owners or regulators. Withdrawal does not eliminate these additional considerations.

Where it goes wrong. Assuming that disagreement over changed terms automatically requires an immediate disclaimer rather than the withdrawal and reporting steps prescribed by SA 210.

Authority. SA 210

Question 13 · 2 marks · Chapter 11: Ethics and Terms of Audit Engagements · medium

Scenario. A firm accepts a new audit engagement after discussions with management but does not issue any engagement letter or other written agreement. Management subsequently argues that the auditor was responsible for preparing the financial statements. Which requirement has the auditor failed to observe?

A firm accepts a new audit engagement after discussions with management but does not issue any engagement letter or other written agreement. Management subsequently argues that the auditor was responsible for preparing the financial statements. Which requirement has the auditor failed to observe?

1. The auditor failed to agree and record the terms of the engagement in an engagement letter or other suitable written agreement. (correct answer)
2. The auditor failed to obtain a board resolution fixing the auditor's sampling methodology and audit materiality.
3. The auditor failed to obtain a guarantee from management that all material misstatements would be corrected.
4. The auditor failed to document management's approval of the final auditor's report before completing fieldwork.

Answer: A — The auditor failed to agree and record the terms of the engagement in an engagement letter or other suitable written agreement.

Explanation. SA 210, paragraphs 9 and 10, require the auditor to agree the terms of the audit engagement with management or those charged with governance, as appropriate, and record the agreed terms in an engagement letter or other suitable written agreement, subject to paragraph 11. This documentation helps avoid misunderstandings about the objective, scope and respective responsibilities. A board-approved sampling plan or assured absence of misstatements is not a substitute.

Where it goes wrong. Assuming that informal agreement is sufficient even when the agreed terms and respective responsibilities have not been properly documented.

Authority. SA 210

Question 14 · 2 marks · Chapter 11: Ethics and Terms of Audit Engagements · hard

Scenario. A statutory auditor of a company observes that the applicable law prescribes the terms of the audit engagement in sufficient detail. Which statement correctly applies SA 210?

A statutory auditor of a company observes that the applicable law prescribes the terms of the audit engagement in sufficient detail. Which statement correctly applies SA 210?

1. The auditor may omit all documentation because a statutory appointment automatically replaces every requirement of SA 210.
2. The auditor must reproduce the entire statutory framework word-for-word in a separate engagement letter for every audit.
3. The auditor may omit written documentation of management responsibilities whenever the company is subject to a statutory audit.
4. A separate written agreement need not duplicate sufficiently prescribed terms, but must record the applicable law and management's acknowledgement and understanding of its responsibilities. (correct answer)

Answer: D — A separate written agreement need not duplicate sufficiently prescribed terms, but must record the applicable law and management's acknowledgement and understanding of its responsibilities.

Explanation. SA 210, paragraph 11, provides a limited exception where law or regulation prescribes the terms of the audit engagement in sufficient detail. The auditor need not record those terms again in a separate written agreement except for the fact that the law or regulation applies and that management acknowledges and understands its responsibilities under paragraph 6(b). The exception is not available merely because the entity is a company subject to statutory audit.

Where it goes wrong. Assuming that every statutory company audit is automatically exempt from engagement documentation, irrespective of the detail prescribed by applicable law.

Authority. SA 210

Question 15 · 2 marks · Chapter 11: Ethics and Terms of Audit Engagements · medium

Scenario. An auditor is approached by a non-profit organisation to audit a special-purpose financial statement prepared for the specific information needs of a grant provider. Which factor should be considered when evaluating the acceptability of the proposed financial reporting framework?

An auditor is approached by a non-profit organisation to audit a special-purpose financial statement prepared for the specific information needs of a grant provider. Which factor should be considered when evaluating the acceptability of the proposed financial reporting framework?

1. Whether the framework has been selected exclusively by the auditor and whether it produces the highest reported surplus.
2. The nature of the entity, purpose and intended users of the statements, nature of the statements and whether the framework is prescribed by law or regulation. (correct answer)
3. Whether the grant provider has agreed to accept any framework selected by management without additional disclosure.
4. Whether the entity's previous accountant used the same framework and whether its balances agree with the prior-year trial balance.

Answer: B — The nature of the entity, purpose and intended users of the statements, nature of the statements and whether the framework is prescribed by law or regulation.

Explanation. SA 210, paragraph 6(a) and paragraph A4, require the auditor to determine whether the financial reporting framework is acceptable. Relevant factors include the nature of the entity, the purpose of the statements, whether they address general or specific user needs, the nature of the financial statements and whether the framework is prescribed by law or regulation. The previous accountant's practice or management's preference alone does not establish acceptability.

Where it goes wrong. Confusing consistency with prior-year accounting practices with the requirement to evaluate the framework against the intended purpose and users of the statements.

Authority. SA 210

Question 16 · 2 marks · Chapter 11: Ethics and Terms of Audit Engagements · hard

Scenario. A first-time audit client has appointed an external accountant to prepare its annual financial statements. Management argues that responsibility for their preparation now rests entirely with that accountant. What should the auditor explain?

A first-time audit client has appointed an external accountant to prepare its annual financial statements. Management argues that responsibility for their preparation now rests entirely with that accountant. What should the auditor explain?

1. The external accountant assumes management's statutory responsibility once the financial statements have been prepared and signed.
2. Responsibility for preparation automatically transfers to the statutory auditor when the external accountant is not an employee.
3. Management must obtain a separate audit report from the external accountant before the statutory auditor can begin work.
4. Assistance from an external accountant does not relieve management of its responsibility for preparing the financial statements under the applicable framework. (correct answer)

Answer: D — Assistance from an external accountant does not relieve management of its responsibility for preparing the financial statements under the applicable framework.

Explanation. SA 210, paragraph 6(b)(i), requires management to acknowledge responsibility for preparation of the financial statements in accordance with the applicable financial reporting framework. Paragraph A19 specifically explains that where a third party assists in preparation, management's responsibility remains unchanged. Outsourcing accounting work therefore does not transfer the fundamental responsibility to the external accountant or auditor.

Where it goes wrong. Mistaking delegation of accounting work to a professional service provider for transfer of management's responsibility for the financial statements.

Authority. SA 210

Question 17 · 2 marks · Chapter 11: Ethics and Terms of Audit Engagements · medium

Scenario. Management requests conversion of an audit into a review engagement before completion because the entity's principal lender has changed its reporting requirement. The engagement partner considers the reason genuine. What should the auditor additionally consider before accepting the change?

Management requests conversion of an audit into a review engagement before completion because the entity's principal lender has changed its reporting requirement. The engagement partner considers the reason genuine. What should the auditor additionally consider before accepting the change?

1. Whether the original audit procedures can automatically be treated as sufficient for the review without any further work.
2. Whether management has agreed to pay the original audit fee in full, because fee recovery is the only relevant matter.
3. The legal or contractual implications of changing the engagement and the requirements and report appropriate to the revised service. (correct answer)
4. Whether the auditor can issue both reports together without revising the original engagement letter or obtaining management's agreement.

Answer: C — The legal or contractual implications of changing the engagement and the requirements and report appropriate to the revised service.

Explanation. SA 210, paragraph 15 and paragraph A31, require the auditor to determine whether reasonable justification exists for a requested change to a lower-assurance engagement. Before agreeing to change an audit to a review or related service, the auditor may also need to assess legal or contractual implications. Prior audit work may be relevant, but the procedures and report must be appropriate to the revised engagement.

Where it goes wrong. Assuming that a genuine change in reporting requirements automatically permits conversion without considering contractual implications or the revised service's requirements.

Authority. SA 210

Question 18 · 2 marks · Chapter 11: Ethics and Terms of Audit Engagements · hard

Scenario. An auditor validly agrees to change an audit engagement to a review engagement after the entity's reporting requirements have genuinely changed. Which treatment of the work already performed is appropriate?

An auditor validly agrees to change an audit engagement to a review engagement after the entity's reporting requirements have genuinely changed. Which treatment of the work already performed is appropriate?

1. The auditor must discard every audit procedure already performed and restart the engagement without considering previous work.
2. The auditor may consider work already performed where relevant, but must perform procedures and issue a report appropriate to the revised review engagement. (correct answer)
3. The auditor must issue the original audit report because work commenced under an audit engagement cannot be used for a lower-assurance engagement.
4. The auditor may issue the review report without further procedures because sufficient audit evidence automatically satisfies review requirements.

Answer: B — The auditor may consider work already performed where relevant, but must perform procedures and issue a report appropriate to the revised review engagement.

Explanation. SA 210, paragraph A32, explains that work performed up to the date of a justified change may be relevant to the revised engagement. However, the procedures required and report to be issued must be those appropriate to the revised engagement. Previous audit procedures are neither automatically discarded nor automatically sufficient for the review. The revised service must be performed in accordance with its applicable professional requirements.

Where it goes wrong. Assuming that work already performed under an audit automatically satisfies every requirement of a lower-assurance engagement.

Authority. SA 210

Question 19 · 2 marks · Chapter 11: Ethics and Terms of Audit Engagements · medium

Scenario. After a valid change from an audit to a review engagement, the auditor prepares the review report. Which reference should ordinarily be excluded from that report to avoid confusing its readers?

After a valid change from an audit to a review engagement, the auditor prepares the review report. Which reference should ordinarily be excluded from that report to avoid confusing its readers?

1. The applicable framework used by management in preparation of the financial information.
2. The scope and nature of the review procedures performed under the revised engagement.
3. The conclusion and level of assurance appropriate to the review engagement.
4. The original audit engagement and procedures performed under it, except where the revised assignment is an agreed-upon procedures engagement. (correct answer)

Answer: D — The original audit engagement and procedures performed under it, except where the revised assignment is an agreed-upon procedures engagement.

Explanation. SA 210, paragraph A32(a)–(b), states that the report on the revised related service should not refer to the original audit engagement or procedures performed under that audit. The specified exception applies when the engagement is changed to agreed-upon procedures, where reference to procedures performed is a normal part of the report. The revised report should describe the new service rather than create confusion about its assurance level.

Where it goes wrong. Assuming that disclosing the earlier audit procedures in a review report is always appropriate merely because the same auditor performed both engagements.

Authority. SA 210

Question 20 · 2 marks · Chapter 11: Ethics and Terms of Audit Engagements · hard

Scenario. An auditor agrees with management to change the engagement from a statutory audit to a review after determining that reasonable justification exists. What must happen to the engagement documentation?

An auditor agrees with management to change the engagement from a statutory audit to a review after determining that reasonable justification exists. What must happen to the engagement documentation?

1. The original audit engagement letter remains sufficient because the revised service relates to the same financial statements.
2. The auditor must obtain approval from the previous statutory auditor before altering the original engagement terms.
3. The auditor and management must agree on the revised terms and record them in an engagement letter or other suitable written agreement. (correct answer)
4. The auditor may record the change only in internal working papers without informing management of the revised responsibilities.

Answer: C — The auditor and management must agree on the revised terms and record them in an engagement letter or other suitable written agreement.

Explanation. SA 210, paragraph 16, expressly requires the auditor and management to agree on and record new engagement terms in an engagement letter or other suitable written agreement whenever the terms are changed. A valid reason for changing the engagement does not remove the documentation requirement. The revised agreement should reflect the nature and scope of the new service and the respective responsibilities of the parties.

Where it goes wrong. Confusing the existence of a justified change in service with exemption from obtaining and recording agreement on the revised engagement terms.

Authority. SA 210

Question 21 · 2 marks · Chapter 11: Ethics and Terms of Audit Engagements · medium

Scenario. Management requests that the auditor change the original audit engagement to a compilation engagement because it no longer requires independent assurance. The auditor determines that the entity genuinely misunderstood the nature of the originally requested service. What should the auditor do before agreeing to the change?

Management requests that the auditor change the original audit engagement to a compilation engagement because it no longer requires independent assurance. The auditor determines that the entity genuinely misunderstood the nature of the originally requested service. What should the auditor do before agreeing to the change?

1. Determine whether the misunderstanding provides reasonable justification and assess any applicable legal or contractual implications of the proposed change. (correct answer)
2. Reject the request automatically because a compilation engagement cannot follow an audit engagement under any circumstances.
3. Agree immediately because management's change in preference removes the need to consider the original engagement terms.
4. Continue the original audit but classify its procedures as compilation procedures without obtaining a revised agreement.

Answer: A — Determine whether the misunderstanding provides reasonable justification and assess any applicable legal or contractual implications of the proposed change.

Explanation. SA 210, paragraph 14 and paragraphs A28–A29, recognise a misunderstanding concerning the nature of the service originally requested as a possible reasonable basis for changing engagement terms. The auditor must assess the justification rather than automatically accept or reject the request. The nature of the revised engagement and any legal or contractual consequences must also be considered before agreement.

Where it goes wrong. Treating a genuine misunderstanding as either an automatic approval or an automatic prohibition, instead of evaluating whether it reasonably justifies the proposed change.

Authority. SA 210

Question 22 · 2 marks · Chapter 11: Ethics and Terms of Audit Engagements · hard

Scenario. A company changes its ownership structure and appoints a new managing director, but the existing engagement letter remains unchanged. Which statement most accurately reflects the auditor's responsibility in a recurring audit?

A company changes its ownership structure and appoints a new managing director, but the existing engagement letter remains unchanged. Which statement most accurately reflects the auditor's responsibility in a recurring audit?

1. The auditor must automatically terminate the engagement because changes in ownership invalidate the original audit appointment.
2. The auditor must assess whether a revised engagement letter or a reminder of the existing terms is appropriate in the circumstances. (correct answer)
3. The auditor may ignore the changes because management's responsibilities remain similar to those of previous years.
4. The auditor must issue a completely new audit engagement letter only after completing the current year's audit report.

Answer: B — The auditor must assess whether a revised engagement letter or a reminder of the existing terms is appropriate in the circumstances.

Explanation. SA 210, paragraph 13 and paragraph A27, require the auditor to assess whether circumstances in recurring audits require revision of the engagement terms or a reminder of existing terms. A significant change in ownership and recent change in senior management are expressly identified factors. The Standard does not require automatic termination or a completely new letter in every recurring audit.

Where it goes wrong. Assuming that the auditor can ignore significant organisational changes merely because the entity has previously been examined under statutory audit by the same firm.

Authority. SA 210

Question 23 · 2 marks · Chapter 11: Ethics and Terms of Audit Engagements · medium

Scenario. A statutory auditor is appointed under a law that prescribes certain management responsibilities in terms similar to SA 210, paragraph 6(b). How should these responsibilities be recorded?

A statutory auditor is appointed under a law that prescribes certain management responsibilities in terms similar to SA 210, paragraph 6(b). How should these responsibilities be recorded?

1. The auditor must ignore the statutory wording and always use an entirely different description of every management responsibility.
2. The auditor may omit all management responsibility documentation because statutory appointment automatically establishes acceptance.
3. The auditor may use the statutory wording for responsibilities that are equivalent in effect to paragraph 6(b), while separately describing those not covered equivalently. (correct answer)
4. The auditor must obtain only an oral acknowledgement because responsibilities already appearing in law need not be documented in writing.

Answer: C — The auditor may use the statutory wording for responsibilities that are equivalent in effect to paragraph 6(b), while separately describing those not covered equivalently.

Explanation. SA 210, paragraph 12, permits the auditor to use statutory wording for management responsibilities that are equivalent in effect to the responsibilities prescribed in paragraph 6(b). Where statutory provisions do not prescribe certain responsibilities equivalently, those responsibilities must still be described using paragraph 6(b). Paragraph A25 confirms that the auditor remains required to obtain written agreement regarding management's acknowledgement and understanding.

Where it goes wrong. Confusing the permission to use equivalent statutory wording with permission to omit management's acknowledgement entirely.

Authority. SA 210

Question 24 · 2 marks · Chapter 11: Ethics and Terms of Audit Engagements · hard

Scenario. An entity is legally required to obtain a statutory audit, but management refuses to acknowledge the responsibilities required under SA 210, paragraph 6(b). Which approach is most appropriate?

An entity is legally required to obtain a statutory audit, but management refuses to acknowledge the responsibilities required under SA 210, paragraph 6(b). Which approach is most appropriate?

1. Accept the audit without further discussion because statutory appointment automatically overrides the preconditions for an audit.
2. Reject the engagement unconditionally because SA 210 permits no exception for audits required by law or regulation.
3. Treat management's refusal as cured by the auditor's statutory right to inspect books and obtain explanations under company law.
4. Discuss the absence of preconditions with management and consider the applicable statutory obligation, since the ordinary non-acceptance requirement is subject to the law-or-regulation exception. (correct answer)

Answer: D — Discuss the absence of preconditions with management and consider the applicable statutory obligation, since the ordinary non-acceptance requirement is subject to the law-or-regulation exception.

Explanation. SA 210, paragraph 8, requires discussion with management when preconditions are absent and states that the auditor shall not accept the proposed engagement unless required by law or regulation to do so. Where a statutory obligation exists, the auditor must consider the applicable legal requirements and cannot simply treat the matter as an ordinary voluntary engagement. Statutory audit rights do not automatically establish management's acknowledgement under paragraph 6(b).

Where it goes wrong. Ignoring the statutory exception in paragraph 8 or assuming that statutory appointment automatically removes every management responsibility required under SA 210.

Authority. SA 210

Question 25 · 2 marks · Chapter 11: Ethics and Terms of Audit Engagements · medium

Scenario. An auditor is unable to agree to management's proposed change in engagement terms and management refuses permission to continue the original audit. Which additional responsibility arises besides withdrawal where legally possible?

An auditor is unable to agree to management's proposed change in engagement terms and management refuses permission to continue the original audit. Which additional responsibility arises besides withdrawal where legally possible?

1. The auditor must issue an unmodified opinion based on the procedures completed before management imposed the restriction.
2. The auditor must determine whether any contractual or other obligation requires reporting the circumstances to those charged with governance, owners or regulators. (correct answer)
3. The auditor must automatically disclose all confidential working papers to every shareholder of the entity.
4. The auditor must convert the engagement into a review regardless of whether the proposed change has reasonable justification.

Answer: B — The auditor must determine whether any contractual or other obligation requires reporting the circumstances to those charged with governance, owners or regulators.

Explanation. SA 210, paragraph 17(a)–(b), requires the auditor, where unable to agree to changed terms and not permitted to continue the original engagement, to withdraw where possible under applicable law or regulation and determine whether any contractual or other obligation exists to report the circumstances to other parties. These may include those charged with governance, owners or regulators. Withdrawal does not create an automatic obligation to disclose all working papers.

Where it goes wrong. Remembering the withdrawal requirement but overlooking the separate responsibility to determine whether reporting the circumstances to other parties is necessary.

Authority. SA 210