The management of an entity feels that it is not necessary for it to give in writingexplicitly to the auditor that it understands its responsibilities for preparation offinancial statements in accordance with applicable financial reporting framework.Discuss, whether, it is necessary for the management to do so. In case managementrefuses, why should an auditor not accept the proposed engagement
Question
The management of an entity feels that it is not necessary for it to give in writingexplicitly to the auditor that it understands its responsibilities for preparation offinancial statements in accordance with applicable financial reporting framework.Discuss, whether, it is necessary for the management to do so. In case managementrefuses, why should an auditor not accept the proposed engagement
Solution
Yes, it is necessary for the management to provide a written assertion to the auditor that it understands its responsibilities for the preparation of financial statements in accordance with the applicable financial reporting framework. This is a requirement under the International Standards on Auditing (ISA) 210, which deals with agreeing the terms of audit engagements.
The reasons for this requirement are as follows:
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Clarity of Roles and Responsibilities: The written assertion helps to clarify the roles and responsibilities of both the management and the auditor. It ensures that both parties are on the same page regarding the scope of the audit and the responsibilities of the management.
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Evidence of Management's Commitment: The written assertion serves as evidence of the management's commitment to the preparation of financial statements in accordance with the applicable financial reporting framework. This is important for the auditor's assessment of the management's integrity and commitment to financial reporting.
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Legal Protection: The written assertion can also serve as a form of legal protection for the auditor. In case of any disputes or legal issues, the auditor can refer to the written assertion as evidence of the management's understanding and acceptance of its responsibilities.
If the management refuses to provide this written assertion, the auditor should not accept the proposed engagement. This is because the refusal could indicate a lack of commitment on the part of the management to the preparation of financial statements in accordance with the applicable financial reporting framework. It could also raise doubts about the management's integrity and its understanding of its responsibilities, which could impact the auditor's ability to perform an effective audit.
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