Terms of Audit Engagements :
Standard on Auditing (SA) 210, “Agreeing the Terms of Audit Engagements” requires that for each period to be audited, the auditor should
agree on the terms of the audit engagement with the bank before beginning significant portions of fieldwork. It is imperative that the terms of the engagement are documented, in order to prevent any confusion as to the terms that have agreed in relation to the audit and the respective responsibilities of the management and the auditor, at the beginning of an audit relationship.
When establishing the terms of engagement, the auditor must agree on its understanding with the management as to the objectives and scope of the audit engagement, the extent of management’s responsibilities and its own responsibilities. This minimises the risk of misunderstandings in future and there is no expectation gap from both the parties.
The form and content of audit engagement letter may vary for one bank to another, but it would generally include reference to following:
The objective of the audit of financial statements.
Management’s responsibility for the financial statements.
Management’s responsibility for selection and consistent application of appropriate accounting policies, including implementation of the applicable accounting standards along with proper explanation relating to material departures from those accounting standards.
Management’s responsibility for assessment of the entity’s ability to continue
as a going concern.
Management’s responsibility for making judgements and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the bank at the end of the financial year and of the profit or loss of the bank for that period.
Management’s responsibility for the maintenance of adequate accounting records and internal controls for safeguarding the assets of the company and for preventing and detecting fraud or other irregularities.
The scope of the audit, including reference to the applicable legislation, regulations, and the pronouncements of the RBI and the ICAI.
The fact that having regard to the test nature of an audit, persuasive rather than conclusive nature of audit evidence together with inherent limitations of any accounting and internal control system, there is an unavoidable risk that even some material misstatements, resulting from fraud, and to a lesser extent error, if either exists, may remain undetected.
Unrestricted access to whatever records, documentation and other information requested in connection with the audit.
The fact that the audit process may be subjected to a peer review and/or quality review under the Chartered Accountants Act, 1949.
The auditor may also include the following matters in the engagement letter:
Arrangements regarding the planning and performing the audit, including the fact that the audit will be carried out in accordance with the auditing standards generally accepted in India. Further, it should be spelt out that the audit would be performed to obtain reasonable assurance about whether the financial statements are free of material misstatements. It should clearly be spelt out that the audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements including assessment of the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation However, having regard to the nature of the audit and volume and complexity of transactions, persuasive rather than conclusive nature of audit evidence, together with inherent limitations of any accounting and internal control system, there is an unavoidable risk that even some material misstatements of financial statements, resulting from fraud, and to a lesser extent error, if either exists, may remain undetected.
Expectation of receiving from management written confirmation concerning representations made in connection with the audit.
Request for the bank to confirm the terms of the engagement by acknowledging receipt of the engagement letter.
Description of any other letters or reports the auditor expects to issue to the bank.
Basis on which fees are computed and any billing arrangements.
A reference to any further agreements between the auditor and the client.
The auditor should require the bank management to identify and inform him about any adverse observations in the implementation of the demonetisation scheme, the effect whereof may need to be considered by including a paragraph in the engagement letter.*
The following are certain specific aspects which need to be kept in mind while issuing an engagement letter in case of banks:
The use and source of specialised accounting principles, with particular reference to any requirements under the law or regulations applicable to
banks, e.g., the Banking Regulation Act, 1949, various RBI master circulars on matters, such as, provision for NPAs, classification and valuation of investments, etc.
The contents and form of the financial statements (including disclosures) and auditors’ report as laid down in the Banking Regulation Act, 1949 and various RBI circulars as well as the various special purpose reports required from the auditor in addition to the report on the financial statements.
The nature of any special communication requirements or protocols that may exist between the auditor and the regulators, e.g., communication directly by the auditor to the RBI in case of serious irregularities or material frauds observed during the course of the audit.
An illustrative format of engagement letter in case of a Nationalised Bank is given in Appendix–VII of this Guidance Note. An illustrative format of engagement letter to be sent to the appointing authority of the Nationalised Bank by Branch Auditor is given in Appendix – VIII of the Guidance Note.
An illustrative format of engagement letter to be sent to the appointing authority of the Banking Company (Where auditor’s responsibility regarding
reporting on Internal Financial Controls is contained within the same Engagement Letter) is given in Appendix – IX of this Guidance Note. An illustrative format of Engagement Letter to be sent to the appointing authority of the Banking Company (Containing auditor’s responsibility regarding reporting on Internal Financial Controls only) is given in Appendix – X of the Guidance Note.