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Total Number of Subscribers: 1626 |
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Date:13th July 2010 |
Compiled by: M Sathya Kumar |
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Several oral
communications exchanged during the course of the audit are given a finality
by putting them in black and white 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. Article by Kali Prasad , The author is a Hyderabad-based chartered accountant |
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