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[The following paragraph was effective for periods beginning on or after December 15, 1999. It was amended by PCAOB Auditing Standard No. 2, effective for audits of fiscal years ending on or after November 15, 2004, for accelerated filers, and on or after July 15, 2005, for all other issuers. See PCAOB Release No. 2004-008.

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AU 310.06

An understanding with the client regarding an audit of the financial statements generally includes the following matters:

  • The objective of the audit is the expression of an opinion on the financial statements.
  • Management is responsible for the entity's financial statements.
  • Management is responsible for establishing and maintaining effective internal control over financial reporting.
  • Management is responsible for identifying and ensuring that the entity complies with the laws and regulations applicable to its activities.
  • Management is responsible for making all financial records and related information available to the auditor.
  • At the conclusion of the engagement, management will provide the auditor with a letter that confirms certain representations made during the audit.
  • The auditor is responsible for conducting the audit in accordance with generally accepted auditing standards. Those standards require that the auditor obtain reasonable rather than absolute assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. Accordingly, a material misstatement may remain undetected. Also, an audit is not designed to detect error or fraud that is immaterial to the financial statements. If, for any reason, the auditor is unable to complete the audit or is unable to form or has not formed an opinion, he or she may decline to express an opinion or decline to issue a report as a result of the engagement.
  • An audit includes obtaining an understanding of internal control sufficient to plan the audit and to determine the nature, timing, and extent of audit procedures to be performed. An audit is not designed to provide assurance on internal control or to identify reportable conditions. However, the auditor is responsible for ensuring that the audit committee or others with equivalent authority or responsibility are aware of any reportable conditions which come to his or her attention.
  • Management is responsible for adjusting the financial statements to correct material misstatements and for affirming to the auditor in the representation letter that the effects of any uncorrected misstatementsfn 3 aggregated by the auditor during the current engagement and pertaining to the latest period presented are immaterial, both individually and in the aggregate, to the financial statements taken as a whole.

These matters may be communicated in the form of an engagement letter. [Paragraph added, effective for engagements on or after June 15, 1998, by Statement on Auditing Standards No. 83. As effective for audits of financial statements for periods beginning on or after December 15, 1999, by Statement on Auditing Standards No. 89.]

fn 3 Section 312, Audit Risk and Materiality in Conducting an Audit, paragraph .04, states that a misstatement can result from errors or fraud. [Footnote added, effective for audits of financial statements for periods beginning on or after December 15, 1999, by Statement on Auditing Standards No. 89.]

Copyright © 2002, American Institute of Certified Public Accountants, Inc.