The Hindu Business Line : The importance of audit letters
Several oral communications exchanged during the course of the audit are given a finality by putting them in black and white.
The ICAI hasissued a standard on audit communications.
M. V. Kali Prasad
Several letters are exchanged between the auditor, the auditee and other persons in the course of an audit. Considering the importance, the ICAI has issued a standard on audit communications.
It is common knowledge that written evidence is more reliable than oral evidence. Several oral communications exchanged during the course of the audit are given a finality by putting them in black and white before concluding the audit.
Appointment letter
Letter of appointment is issued by the auditee to the auditor. Appointment of the auditor is by way of a resolution passed at the annual general meeting of the company. The Contract Act requires that the offer is to be communicated to the offeree. This letter of appointment is the communication from the auditee to the auditor of his appointment. A copy of the resolution passed appointing him as the auditor is attached to the letter of appointment.
The letter of appointment contains the terms of reference, scope of work, remuneration, timeframe within which the assignment is to be completed and the authority to which the report is to be submitted.
Letter of appointment is required in case of statutory audits also.
The Companies Act has several provisions on the appointment of the auditor and the scope of work. Communication of such appointment is in compliance with the Contract Act. Since the audit of a company is under statute, scope of work is determined by law, the letter of appointment merely mentions of the appointment of the auditor.
The auditor is required to communicate to the MCA whether or not he has accepted the appointment within 30 days of the date of receipt of the communication of his appointment (Form 23B). A scanned copy of the letter of appointment is to be attached to the form to be submitted to the MCA.
But in case of voluntary audit, the terms of appointment, scope of work and limitations of scope, etc., has to be clearly stated in the letter of appointment to avoid confusion or controversy at a later date.
The Contract Act requires the acceptance to be communicated to the proposer. The auditor has to communicate to the auditee whether or not the assignment is accepted. The appointment is completed only when the acceptance is communicated by the auditor.
Letter of engagement
Letter of engagement is issued by the auditor to the auditee. This letter is the acceptance of the assignment and it sets out the scope of work as understood by the auditor. This letter of engagement contains the details of the work entrusted, limitations as to scope of work, etc.
Considering its importance, the ICAI has issued a separate standard on terms of reference. The standard suggests separate letters of engagement be issued for each of the assignment such as statutory audit, tax audit, etc.
The following details are contained in a letter of engagement:
Responsibility of the management such as selection of appropriate accounting policies and their consistent application, preparation and presentation of financial statements;
Scope, objective and limitations to scope of work;
Right of access to books of account;
Basis for computation of fees and reimbursement of expenditure; and
Need for appointment of experts if necessary.
Such a letter of engagement acquires significance, particularly in the case of voluntary audits such as internal audits, audits of non-corporate entities, etc., to avoid confusion and misunderstanding of the work entrusted to the auditor.
Letters seeking confirmations are sent by the auditor to the debtors and creditors, bankers, consignees, outsourcing agencies, etc. Confirmations are classified as positive confirmations and negative confirmations.
The auditor can choose the kind of confirmation he requires from the respondents. Standard on external confirmations issued by the ICAI formulated guidelines to seek such confirmations and the basis of evaluation of such confirmations. The auditor may require the confirmations be sent to him directly.
Letter of weakness is issued by the auditor to the management. Upon a proper evaluation of the internal control systems, the auditor should bring to the notice of the management, any weaknesses observed by him in the internal control systems.
The auditor might as well tumble upon a weakness in the system even during the course of the audit. The auditor should consider the probability of frauds arising out of the weaknesses in the internal control systems.
In view of the likelihood of misstatements, the auditor should use his judgment to decide if any additional, amended, altered extended audit procedures would be essential.
Letters to experts is issued by the auditor to the experts engaged by him. The letter should have clarity and be specific in the matter on which he seeks an opinion. The letter should contain the terms of reference, time frame within which the opinion is to be obtained and a categorical statement that the auditor might consider and rely upon the opinion of the expert in forming his opinion on the company as a whole.
Letters to shareholders
Letters to shareholders are issued by the auditor if the situation so warrants. In case the management infringes into his independence or in case he unearths a fraud played by the management, he may go to the shareholders.
Certain of the matters cannot be mentioned in the audit report because of confidentiality and the strict code of conduct, which prohibits the auditor to divulge any information obtained by the auditor to a third party, unless he is required so to do by law.
The profession also requires the auditor to communicate to the shareholders of any frauds by the management, even if the loss is made good by the management. Letter to the shareholder could be one of the options available to the auditor.
(The author is a Hyderabad-based chartered accountant.)More Stories on : Auditing | Insight
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