Audit Engagement & Planning

🟢 Lite — Quick Review (1h–1d)

Engagement & Planning — Key Facts for ACCA/CA Pakistan

• ISA 300 — Planning an audit of financial statements
• ISA 210 — Agreeing the terms of the audit engagement
• ISA 310 — Knowledge of the business (in updated standards, part of ISA 315 risk assessment)
• Engagement Letter: Formal written agreement confirming auditor’s acceptance, responsibilities, scope, and fees
• Preconditions of an Audit: Management’s responsibilities + access to information + no restrictions
• Audit Strategy: Sets scope, timing, direction of audit
• Audit Plan: Detailed procedures to implement audit strategy

⚡ Exam Tip: A common exam trap — students confuse “engagement letter” (legal/contractual) with “audit plan” (procedural). The engagement letter is signed BEFORE the audit begins; the plan is developed DURING planning.

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🟡 Standard — Regular Study (2d–2mo)

Engagement & Planning — Detailed Content

ISA 210 — Agreeing Terms of Engagement: Before accepting a new audit engagement, the auditor must:

1. Determine whether preconditions for an audit exist
2. Confirm management’s acceptance of responsibilities
3. Communicate agreed terms in an engagement letter

Preconditions of an Audit (ISA 210):

Precondition	What It Means
Financial reporting framework	Management selects applicable framework (e.g., IFRS, local GAAP)
Management responsibility	Management acknowledges and accepts responsibility for FS preparation
Access to information	Auditor must have access to all books, records, documents needed
No scope restrictions	No limitations on audit procedures or timing

If preconditions are not met, the auditor should discuss the matter with management. If unresolved, the auditor may decline or withdraw.

Engagement Letter — Key Contents:

• Objectives and scope of the audit
• Management’s responsibilities (as above)
• Auditor’s responsibilities
• Reference to ISAs and applicable law
• Expected format and content of reports
• Fee arrangement and billing terms
• Any limitations of liability (where permitted)
• Basis for engagement acceptance/continuation

ISA 300 — Planning an Audit:

Audit Strategy covers:

• Scope of the engagement
• Reporting objectives
• Timing of the audit
• Direction of the audit effort
• Engagement resources (team, expertise, supervision)

Audit Plan covers:

• Risk assessment procedures
• Further audit procedures (substantive/testing)
• Other audit procedures as required

Knowledge of the Business (ISA 315/310): The auditor must obtain knowledge of the business sufficient to:

• Identify business risks (events, conditions, actions that threaten achievement of objectives)
• Assess inherent risk
• Plan appropriate responses

Factors to consider:

• Industry environment and regulatory framework
• Nature of the entity’s business (products, markets, revenue model)
• Entity’s objectives, strategies, and related business risks
• Measurement and review of financial performance (KPIs, budgets)
• Organizational structure and ownership

⚡ Exam Tip: In planning questions, always identify TWO levels: audit strategy (the “what and why”) and audit plan (the “how”). They are NOT the same thing.

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🔴 Extended — Deep Study (3mo+)

Comprehensive Engagement & Planning Notes

Acceptance and Continuance of Engagements:

Before accepting or continuing an audit, the firm must:

1. Perform client acceptance/continuance procedures (new vs existing client)
2. Assess ethical compliance (independence, conflicts of interest)
3. Evaluate competence and capabilities (team skills, resources, time)
4. Obtain partner approval for new engagements

New Client Acceptance Checklist:

• Obtain references from previous auditor (with client consent)
• Review financial stability and integrity of new client
• Check for conflicts with existing clients
• Verify regulatory requirements are met
• Ensure engagement team has necessary competence

Audit Planning Process — Step by Step:

Step 1: Perform preliminary engagement activities
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Step 2: Establish audit strategy (scope, timeline, resources)
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Step 3: Develop audit plan (specific procedures)
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Step 4: Communicate with those charged with governance (planning matters)
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Step 5: Document planning decisions

ISA 220 — Quality Management at Engagement Level: The engagement partner is responsible for overall quality on the engagement:

• Ensure the engagement team understands their responsibilities
• Ensure the engagement is performed in accordance with firm’s quality management policies
• Ensure appropriate consultation occurs on difficult matters
• Review work performed and conclude on sufficient appropriate evidence

The Engagement File:

• Must be completed within 60 days of auditor’s report date
• Ownership: documents belong to auditor (with some exceptions)
• Confidentiality: must be maintained
• Retention period: typically 5-7 years (varies by jurisdiction)

Planning for High-Risk Areas: When risk of material misstatement is high, the auditor should:

• Assign more experienced staff
• Increase sample sizes
• Perform more substantive procedures at year-end
• Consider involving specialists
• Increase supervision and review

Common Exam Mistakes:

Mistake	Correction
Calling engagement letter an “audit contract”	Engagement letter is evidence of contract terms, not the contract itself
Confusing planning with execution	Planning = what to do; execution = doing it
Forgetting to reassess planning in subsequent years	Audit strategy should be reassessed each year
Not linking business risk to financial statement risk	Business risks → Financial statement risks → Audit risks

Who is “Those Charged with Governance” (TCWG)?

• Board of Directors (listed companies)
• Audit Committee (sub-committee of board)
• Trustees (for trusts/foundations)
• Partners (for partnerships)

Auditor must communicate planning matters to TCWG — not just management.

⚡ High-Yield Summary:

Preconditions → Engagement Letter → Audit Strategy → Audit Plan → Document & Communicate

⚡ Exam Answer Framework for Engagement Questions:

1. Identify the issue (e.g., client does not want auditor to confirm receivables)
2. Classify — Is this a preconditions issue? Scope restriction? Ethical matter?
3. Apply relevant ISA (ISA 210, ISA 300, ISA 220)
4. Recommend course of action (discuss with management, document, consider withdrawal if unresolved)
5. Conclude with implications for audit report (scope limitation → qualified/disclaimer)

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