AU Section 310

Appointment of the Independent Auditor ^fn *fn **

• (.01 - .02)
• (.03) Appointment of the Independent Auditor
• (.04) Appointment of Auditor Near or After the Year-End Date
• (.05 - .07) Establishing an Understanding With the Client

Source: SAS No. 1, section 310; SAS No. 45; SAS No. 83; SAS No. 89.

Issue date, unless otherwise indicated: November, 1972.

.01

The first standard of field work is:

The work is to be adequately planned and assistants, if any, are to be properly supervised.

.02

Audit planning is discussed in Auditing Standard No. 9, Audit Planning, and supervision of engagement team members is discussed in Auditing Standard No. 10, Supervision of the Audit Engagement.

Appointment of the Independent Auditor

.03

Consideration of the first standard of field work recognizes that early appointment of the independent auditor has many advantages to both the auditor and his client. Early appointment enables the auditor to plan his work so that it may be done expeditiously and to determine the extent to which it can be done before the balance-sheet date.

Appointment of Auditor Near or After the Year-End Date

.04

Although early appointment is preferable, an independent auditor may accept an engagement near or after the close of the fiscal year. In such instances, before accepting the engagement, he should ascertain whether circumstances are likely to permit an adequate audit and expression of an unqualified opinion and, if they will not, he should discuss with the client the possible necessity for a qualified opinion or disclaimer of opinion. Sometimes the audit limitations present in such circumstances can be remedied. For example, the taking of the physical inventory can be postponed or another physical inventory can be taken which the auditor can observe. (See section 331.09-.13.)

Establishing an Understanding With the Client 

 .05

The auditor should establish an understanding with the client regarding the services to be performed for each engagement. ^fn 1 Such an understanding reduces the risk that either the auditor or the client may misinterpret the needs or expectations of the other party. For example, it reduces the risk that the client may inappropriately rely on the auditor to protect the entity against certain risks or to perform certain functions that are the client's responsibility. The understanding should include the objectives of the engagement, management's responsibilities, the auditor's responsibilities, and limitations of the engagement. ^fn 2 The auditor should document the understanding in the working papers, preferably through a written communication with the client. If the auditor believes an understanding with the client has not been established, he or she should decline to accept or perform the engagement. [Paragraph added, effective for engagements for periods ending on or after June 15, 1998, by Statement on Auditing Standards No. 83.]

.06

An understanding with the client generally includes the following matters.

• The objective of the audit is:
  • Integrated audit of financial statements and internal control over financial reporting: The expression of an opinion on both management's assessment of internal control over financial reporting and on the financial statements.
  • Audit of financial statements: 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. If, in an integrated audit of financial statements and internal control over financial reporting, the auditor concludes that he or she cannot express an opinion on internal control over financial reporting because there has been a limitation on the scope of the audit, he or she should communicate, in writing, to management and the audit committee that the audit of internal control over financial reporting cannot be satisfactorily completed.
• 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 the standards of the Public Company Accounting Oversight Board. Those standards require that the auditor:
  • Integrated audit of financial statements and internal control over financial reporting: Obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud, and whether management's assessment of the effectiveness of the company's internal control over financial reporting is fairly stated in all material respects. Accordingly, there is some risk that a material misstatement of the financial statements or a material weakness in internal control over financial reporting would remain undetected. Although not absolute assurance, reasonable assurance is, nevertheless, a high level of assurance. Also, an integrated audit is not designed to detect error or fraud that is immaterial to the financial statements or deficiencies in internal control over financial reporting that, individually or in combination, are less severe than a material weakness. 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.
  • Audit of financial statements: Obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. Accordingly, there is some risk that a material misstatement would remain undetected. Although not absolute assurance, reasonable assurance is, nevertheless, a high level of assurance. Also, a financial statement 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:
  • Integrated audit of financial statements and internal control over financial reporting: Planning and performing the audit to obtain reasonable assurance about whether the company maintained, in all material respects, effective internal control over financial reporting as of the date specified in management's assessment. The auditor is also responsible for obtaining an understanding of internal control sufficient to plan the financial statement audit and to determine the nature, timing, and extent of audit procedures to be performed. The auditor is also responsible for communicating in writing:
    • To the audit committee - all significant deficiencies and material weaknesses identified during the audit.
    • To management - all internal control deficiencies identified during the audit and not previously communicated in writing by the auditor or by others, including internal auditors or others inside or outside the company.
    • To the board of directors – any conclusion that the audit committee's oversight of the company's external financial reporting and internal control over financial reporting is ineffective.
  • Audit of financial statements: 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 internal control deficiencies. However, the auditor is responsible for communicating in writing:
    • To the audit committee - all significant deficiencies and material weaknesses identified during the audit.
    • To the board of directors – if the auditor becomes aware that the oversight of the company's external financial reporting and internal control over financial reporting by the audit committee is ineffective, that conclusion.
• 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 misstatements ^fn 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 for periods ending on or after June 15, 1998, by Statement on Auditing Standards No. 83. As amended, effective for audits of financial statements for periods beginning on or after December 15, 1999, by Statement on Auditing Standards No. 89.]

.07

An understanding with the client also may include other matters, such as the following:

• Arrangements regarding the conduct of the engagement (for example, timing, client assistance regarding the preparation of schedules, and the availability of documents)
• Arrangements concerning involvement of specialists or internal auditors, if applicable
• Arrangements involving a predecessor auditor
• Arrangements regarding fees and billing
• Any limitation of or other arrangements regarding the liability of the auditor or the client, such as indemnification to the auditor for liability arising from knowing misrepresentations to the auditor by management (Regulators, including the Securities and Exchange Commission, may restrict or prohibit such liability limitation arrangements.)
• Conditions under which access to the auditor's working papers may be granted to others
• Additional services to be provided relating to regulatory requirements
• Arrangements regarding other services to be provided in connection with the engagement

[Paragraph added, effective for engagements for periods ending on or after June 15, 1998, by Statement on Auditing Standards No. 83.]