Accountancy and auditing are pursuits of a noble profession, the conduct of its members is governed by a set of the rules. One of the rules forbids chartered accountants to solicit clients. Clients must themselves find their auditors. A client is anybody or any entity which requires the service of a professional accountant for the audit of the accounts or for any other purpose. Clients may be individuals, partnership firms, companies, societies, clubs, trust, co-operative societies, government, etc. Of these, the legal requirement to get the accounts audited so far extends only to companies, cooperative societies, and registered societies. In these cases the respective law governs the appointment of auditors and their duties. In all other cases, it is a matter of contract. The client tells the auditor the nature of service he requires and the auditor, if he is agreeable to undertake the assignment, specifies his terms. He must sign an agreement, if he accepts the work in terms of the agreement subject to professional standards. Clients who are not statutorily required to get their accounts audited may require preparation of accounts for tax-returns, checking of the sales tax-returns, etc. besides audit. There may be a misunderstanding about the exact scope of the work; the auditor may think that he is merely required to prepare accounts while the client may think audit of accounts, is also covered. It is, therefore, of the greatest importance, both for the auditor and client, that each party should be clear about the nature of the engagement: it must be reduced in writing and should exactly specify the scope of the work. The audit engagement letter is sent by the auditor to his client which documents the objective and scope of the audit, the extent of his responsibilities to the client and the form of report.
The ICAI has issued AAS 26 on the subject. It is in the interest of both the auditor and the client to issue an engagement letter so that the possibility of misunderstanding is reduced to a great extent. In the case of partnerships, a few more precautions are needed. The appointment of the auditor is normally governed by the partnership deed. The accountant, when he is approached for undertaking a professional assignment by a firm or a partner of a firm, should first get a clear idea of the nature of the service required and then ensure, with reference to the terms of partnership agreement that his appointment is valid. Above all, he should bear in mind that all partners jointly and severally are his clients, though he might have been appointed by only one of them if so, authorised under the partnership deed. He must see that the individual interests of the partners have not been adversely affected in any manner and the provisions of the partnership deed regarding accounting have been fully given effect to.
In case of a recurring audit, the auditor may decide not to send a new engagement letter each period.
However, the following factors may make it appropriate to send a new letter:
- Any indication that the client misunderstands the objective and scope of the audit.
- Any revised or special terms of the engagement.
- A recent change in senior management, board of directors or ownership.
- A significant change in nature or size of the client’s business.
- Legal requirements or pronouncements of the Institute of Chartered Accountants of India, or changes in the existing ones.
Acceptance of a Change in Engagement: An auditor who, before the completion of the engagement, is requested to change the engagement to one which provides a lower level of assurance, should consider the appropriateness of doing so. A request from the client for the auditor to change the engagement may result from a change in
circumstances affecting the need for the service, a misunderstanding as to the nature of an audit or related service originally requested or a restriction on the scope of the engagement, whether imposed by management or caused by circumstances. The auditor would consider carefully the reason given for the request, particularly the implications of a restriction on the scope of the engagement, specially any legal or contractual implications.
If the auditor concludes that there is reasonable justification to change the engagement and if the audit work performed complied with the AASs applicable to the changed engagement, the report issued would be appropriate for the revised terms of engagement. In order to avoid confusion, the report would not include reference to:
- the original engagement; or
- any procedures that may have been performed in the original engagement, except where the engagement is changed to an engagement to undertake agreed-upon procedures and thus reference to the procedures performed is a normal part of the report. The auditor should not agree to a change of engagement where there is no reasonable justification for doing so.