SSA 210 – Agreeing the Terms of Audit Engagement

This SSA is effective after periods ending 15 Dec 2016.

This SSA deals with auditor’s responsibilities in agreeing the terms of the audit engagement with management and those charged with governance.

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:

  1. a) Establish whether preconditions for an audit are present; and b) confirm whether there is a common understanding between auditor and management

Preconditions are firstly that the FR framework is acceptable. Next, management understands its responsibility to prepare FS in accordance with the FR framework and to have internal controls to enable the preparation of FS to be free from material misstatement, whether due to fraud or error (via a management representation to the auditor). Agreeing the terms of the audit engagement will help avoid misunderstanding about one another’s responsibilities.

Management should allow the auditor (i) access to information; (ii) any additional information; (iii) unrestricted access to persons for whom the auditor determines necessary to obtain audit evidence.

If the preconditions are not met, auditor shall discuss with management and auditor will consider not to accept the proposed engagement. If not possible due to law/regulations, auditor will need to explain to management the importance of these matters and implications for the auditor’s report.

Auditor needs to draft an engagement letter. Auditor should not agree to changes to the terms when there is no reasonable justification for doing so, for instance from changing from an audit engagement to a review engagement in order to avoid the qualified opinion that will be issued by the auditor. If there are changes, both parties will need to acknowledge them.

Assurance and audit engagements may only be accepted when the practitioner considers that relevant ethical requirements such as independence and professional competence will be satisfied, and when the engagement exhibits certain characteristics.

Some general purpose frameworks are the Financial Reporting Standards (FRS) promulgated by the Accounting Standards Council etc.

Please read the SSA for more details of what sections are required in the engagement letter.

For Singapore incorporated companies, the description of responsibilities for the financial statements is as follows:

Management is responsible for the preparation of FS that give a true and fair view in accordance with the provision of the Companies Act, Chapter 50 and Financial Reporting Standards in Singapore, and for devising and maintaining a system of internal accounting controls sufficient to provide a reasonable assurance that assets are safeguarded against loss from unauthorized use or disposition; and transactions are properly authorized and that they are recorded as necessary to permit the preparation of true and fair financial statements and to maintain accountability of assets.

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SSA 220 – Quality Control for an Audit of Financial Statements

This SSA concerns the responsibilities of the auditor relating to quality control procedures and also the responsibilities of the EQCR (engagement quality control reviewer). This is necessary in order to comply with SSQC1. EQCR is useful as it gives assurance that the audit complies with professional standards and applicable legal and regulatory requirements.

The engagement partner shall take responsibility for the overall quality on each audit engagement. Quality is essential in performing audit engagements. He needs to remain alert for evidence of non-compliance with ethical requirements (ACRA code). If there is non-compliance, appropriate action must be taken.

The partner also needs to assess and conclude on the independence requirements (eliminate the activity, withdraw the engagement if not-independent). He needs to be satisfied on appropriate procedures in relation to acceptance and continuance of client relationships and audit engagements. He needs to be satisfied that the engagement team has the right competence and capabilities. He is also responsible for the right direction, supervision (track progress of engagement, address significant matters, identify matters for consultation) and performance of the audit engagement.

In addition, they are responsible for consultations that are taken within the engagement team.

For audits that require EQCR, the partner shall discuss significant matters arising during the engagement with the EQCR reviewer. The audit report should only be stated on or after the EQCR review and the EQCR should be conducted in a timely manner.

The EQCR needs to look at discussion of significant matters, review of FS, review of selected audit documentation and evaluation of the conclusions reached. They also might need to examine independence of the audit firm, and whether there is appropriate consultation.

There needs to be a proper monitoring process for EQCR as well, and to ensure that P&P relating to system of quality control are relevant, adequate and operating effectively. Partners can usually rely on the system of quality control and the role of engagement teams.

Reviews by the engagement partner must be timely in nature and they should examine areas like critical areas of judgment, significant risks, other areas etc. The engagement partner need not review all audit documentation, but may do so. However, as required by SSA230, the partner documents the extent and timing of the reviews.

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Singapore Standards of Auditing 200 (SSA) Summary

SSA 200 Summary

This SSA concerns the responsibilities and objectives of the external auditor when conducting an FS audit.

The purpose of an audit is to express an opinion on whether FS is presented fairly, in all material aspects, or give a true and fair view in accordance with the financial reporting framework. There is no need to provide assurance on viability of business, efficiency or effectiveness of business processes or effectiveness of internal controls.

The auditor needs to obtain reasonable assurance (high level) about whether the FS as a whole are free from material misstatement, whether due to fraud or error. Audit risk (function of risk of material misstatement and detection risk) should be reduced to an acceptably low level. This is the risk that auditor expresses an inappropriate opinion when the FS is materially misstated. Note that reasonable assurance is not absolute assurance.

The auditor needs to apply the concept of materiality (FS and assertion level for classes of transactions, account balances and disclosures). Auditor is not responsible for detection of misstatements which are not material to the FS.

The SSAs requires the auditor to identify and assess risks of material misstatement (ROMM), obtain sufficient and appropriate audit evidence and form opinion on the FS based on conclusion from audit evidence.

If reasonable assurance cannot be obtained, the auditor should disclaim an opinion or withdraw from the engagement.

The management and those charged with governance are responsible for preparing FS in accordance to financial reporting framework, appropriate internal controls over financial reporting, provide auditor with unrestricted access to information for the audit.

ROMM comprises of two components, the inherent risk component (higher for complex transactions and those requiring accounting estimates) and the control risk (cannot full eliminate ROMM due to inherent limitations such as human errors or mistakes or management override of controls) component.

As per SSA, the auditor needs to comply with relevant ethical requirements (ACRA code related to audit of FS and Integrity, Objectivity, professional competence and due care, confidentiality, professional behaviour), exercise professional scepticism (critical assessment of audit evidence, looking out for fraud risks, looking out for reliability of evidence) and professional judgment (materiality, extent of audit procedures, evaluating management judgments, drawing conclusions based on audit evidence) in planning and performing the audit.

Auditors have to comply with all SSAs that are relevant to the audit. If there is a failure to achieve an objective, there may be a need to modify the auditor’s opinion or withdraw from the engagement.

As part of preparing the FS, management may need to exercise judgment and make accounting estimates which are reasonable in the circumstances.

Management and those charged with governance have to acknowledge and understand a set of responsibilities for accepting the audit engagement.

The auditor must be independent both in mind and in appearance. This is to enhance the auditor’s ability to act with integrity and be objective and to maintain professional scepticism.

Refer to SSA 220 for quality assurance and partner review requirements.

Detection risk relates to the nature, timing and extent of the auditor’s procedures that are determined by the auditor to reduce audit risk to an acceptably low level.

Some of the inherent limitations of the audit include information that is withheld by the management and complicated fraud schemes which is difficult for auditor to detect. Auditor is also not trained to authenticate original documents. The audit must also be performed within a reasonable time and cost. However, despite these limitations, auditor should not accept less than persuasive evidence.  

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