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Audit Framework and RegulationPreconditionsISA 210Engagement AcceptanceSyllabus Area A

ACCA · Question 05 · Audit Framework and Regulation

SECTION A - CASE 1: NEUROCLOUD ANALYTICS CO

NeuroCloud Analytics Co is a fast-growing tech startup providing AI-driven data analytics to the healthcare sector. You are an audit manager at Turing & Co, planning the audit for the year ended 31 December 20X5. NeuroCloud is not a public interest entity (PIE).

During the planning phase, you note the following:

  1. The projected audit fee from NeuroCloud represents 18% of Turing & Co's total fee income for the year.
  2. NeuroCloud has requested Turing & Co to design and implement a new IT system for their financial reporting.
  3. NeuroCloud's CEO also acts as the Chairman of the Board.
  4. An audit junior overheard confidential discussions about a revolutionary unreleased AI model and subsequently purchased shares in NeuroCloud.

Question:
Before accepting the audit engagement for NeuroCloud, Turing & Co must establish whether the preconditions for an audit are present. Which TWO of the following are preconditions for an audit according to ISA 210 Agreeing the Terms of Audit Engagements?

Answer options:

A.

Determining whether the financial reporting framework to be applied in the preparation of the financial statements is acceptable.

B.

Ensuring that the audit fee is agreed upon and paid in advance of the audit work commencing.

C.

Obtaining the agreement of management that it acknowledges and understands its responsibility for internal control.

D.

Confirming that the client has an established internal audit function.

How to approach this question

Recall ISA 210. The preconditions are: 1) Acceptable financial reporting framework. 2) Management's agreement of its responsibilities (preparation of FS, internal control, providing auditor with access to information).

Full Answer

ISA 210 requires the auditor to establish whether the preconditions for an audit are present. This involves determining the acceptability of the financial reporting framework and obtaining management's agreement that it acknowledges its responsibilities for the financial statements, internal control, and providing the auditor with necessary access.

Common mistakes

Selecting commercial terms (like fees) instead of the technical preconditions required by auditing standards.
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