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Unit 5: Audit Planning

decide to discontinue the relationship if the client is deemed to lack integrity. Under the Ethical Notes
Standards the auditor may have to discontinue association if there are ethical issues (if the client
is involved in litigation against the auditor, there are unpaid fees, independence issues etc.). The
auditor may also decide the particular engagement is too high risk. Client acceptance and
continuance is an important part of determining audit risk.

Self Assessment

Fill in the blanks:
1. Main benefits from planning audits are .................; ................ and .............
2. ............................ is an important part of determining audit risk.
3. ..................... states that audit firms should establish policies and procedures for the acceptance
and continuance of client relationships

5.6 Obtaining an Understanding with the Client

A clear understanding of the terms of the engagement should exist between the client and the
auditor. ISA 210 describes the contents of an engagement letter. Although the standard does not
require use of an engagement letter, the guidance is provided in a manner that presumes use of
an engagement letter. According to ISA 210, “the auditor and the client should agree on the terms of the
engagement.”

ISA 210 states that, “the auditor should ensure that the engagement letter or other form of suitable
contract documents and confirms the auditor’s acceptance of the appointment and includes a summary of
the responsibilities of those charged with governance and of the auditor.”

The terms of the engagement include consideration of what is to be done (the objective, scope,
and report of the audit) by who (the staff) and for how much (the fee). The agreed terms would
need to be recorded in an audit engagement letter or other suitable form of contract. The
engagement letter may also include an agreement to provide other services such as tax returns.

Did u know? It should also state any assistance to be provided by the client personnel in
obtaining books and records, and schedules to be prepared for the auditor. It will outline
the auditor’s responsibilities in relation indictable offences and money laundering. It also
serves the purpose of informing the client that the auditor cannot guarantee that all fraud
will be detected.

5.7 Develop Overall Audit Strategy

ISA 300 necessitates that the overall audit strategy should be established at the beginning, and
updated and amended as required during the course of the audit. The auditor may need to revise
his Overall Audit Strategy and Overall Audit Plan (and thereby the planned nature, extent and
timing of further audit procedures) when unexpected events, changed conditions or the audit
evidence achieved from audit procedures lead to information that is significantly different from
information available to the auditor when he first planned his audit.
The purpose of the overall audit strategy is to develop an effective response to the risk of
material misstatement. The auditor considers what they found in preliminary planning activities
such as client acceptance, ethical position of the audit firm and their understanding of the entity
and its environment, including its internal control, to develop an effective and efficient overall

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