A2 M3

A2 M3 - TERMS OF ENGAGEMENT 1. Audit Committees a. Responsible for the selection and appointment of the independent external auditor b. And reviewing nature and scope of the engagement 2. Sarbanes-Oxley Act (generally issuers/public companies) a. Auditor reports to and is overseen by the client's audit committee 3. Those Charged w/ Governance a. Those who bear responsibility to oversee obligations ("BOD"/"audit committee") b. Auditor REQUIRED to communicate certain matters to those charged w/ governance Client Acceptance and Continuance  Auditor should assess the following: o Firm's Ability to Meet Reporting Deadlines o Firm's Ability to Staff the Engagement (experience and availability) o Independence o Integrity of Client Management o Group Audits Preconditions for an Audit  Applicable Financial Reporting Framework o U.S. GAAP or IFRS  Management Responsibilities o Preparation and fair presentation of the financial statements o The design, implementation, and maintenance of internal control o To provide the auditor with:  Access to all information  Unrestricted access to persons Management-Imposed Scope Limitation  If major  audit should NOT accept an engagement o Lack of records = scope limitation  Audit Required by Law or Regulation o Entities that get government funding o Audit is permitted, but not required, to accept engagement when there is a management-imposed scope limitation  Scope Limitations That Do Preclude Engagement Acceptance o If management scope-limitation result in a qualified opinion OR it is beyond management's control  auditor may still accept the engagement Agreement on Audit Engagement Terms  Should be documented in a signed engagement letter  Typically would NOT include specific audit procedures but overall audit strategy  Reduces risk of misinterpretation

Required Contents  Objective and scope of the audit  Responsibilities of the auditor  Responsibilities of management (FS and IC)  Inherent limitations and that some material misstatements may NOT be detected  Identification of applicable financial reporting framework  Reference to the expected form and content of any reports** Other Contents  Communication of KAM  Timing  Expectation that management will provide written representations  Use of other auditors/specialists/internal auditors  Arrangements w/ predecessor auditor Recurring Audits  an engagement for an existing audit client (performed the preceding audit)  Revising the Terms of the Engagement o Any change in legal or regulatory requirements o Any revised or special engagement terms o A change in senior management Initial Audits  Talk to prior CPA  Communication with the predecessor auditor = MANDATORY  If client is unwilling to agree  consider withdrawing  Auditor should make oral or written inquiries (and workpapers) of the predecessor auditor o Info on management integrity o Disagreements w/ management o Reasons for the change of auditors o Communication regarding fraud or noncompliance o Related parties and significant unusual transactions Change in Engagement  Change from audit  to a compilation or to a review  Change must be justified  Reasons for Change o Acceptable  Change in client requirements or misunderstanding as to the nature of the service to be rendered o Unacceptable (consider withdrawing)  Engagement would uncover errors or fraud  The client is attempting to create misleading or deceptive financial statements

 Scope Limitations (consider withdrawing) o Client refuses to allow correspondence w/ legal counsel o Client refuses to provide a signed representation letter  Compilation/Review Report Not Permitted o Cannot be permitted if any of the scope limitations above occur NOTES FROM MC:  Do NOT need to review engagement letter from predecessor auditor prior to acceptance  If the predecessor auditor refuses to give the current auditor access to documentation  current auditor should review the risk assessment of the opening balances of the FS  If client request to change the engagement from audit to compilation  auditor MUST consider the effort needed to complete the audit, the cost of completing the audit and the reasons for the client's request  Contingent fees between the company and the auditor would cause a loss of independence  Performance by the auditor of certain non-audit services such as bookkeeping and other services related to the accounting records or financial statements of the audit client are NOT allowable