If management or those charged with governance impose a limitation on the scope of the auditor’s work in the terms of a proposed audit engagement such that the auditor believes the limitation will result in the auditor disclaiming an opinion on the financial report, the auditor shall not accept such a limited engagement as an audit engagement, unless required by law or regulation to do so. 

Other Factors Affecting Audit Engagement Acceptance

If the preconditions for an audit are not present, the auditor shall discuss the matter with management. Unless required by law or regulation to do so, the auditor shall not accept the proposed audit engagement: 

1. If the auditor has determined that the financial reporting framework to be applied in the preparation of the financial report is unacceptable, except as provided in paragraph 19 of this Auditing Standard; or  
2. If the agreement referred to in paragraph 6(b) of this Auditing Standard has not been obtained. 

The auditor shall agree the terms of the audit engagement with management or those charged with governance, as appropriate.  (Ref: Para. A22)

Subject to paragraph 11 of this Auditing Standard, the agreed terms of the audit engagement shall be recorded in an audit engagement letter or other suitable form of written agreement and shall include: (Ref: Para. A23‑A26)

1. The objective and scope of the audit of the financial report; 
2. The responsibilities of the auditor; 
3. The responsibilities of management; 
4. Identification of the applicable financial reporting framework for the preparation of the financial report; and 
5. Reference to the expected form and content of any reports to be issued by the auditor and a statement that there may be circumstances in which a report may differ from its expected form and content. (Ref: Para. A25)

If law or regulation prescribes in sufficient detail the terms of the audit engagement referred to in paragraph 10 of this Auditing Standard, the auditor need not record them in a written agreement, except for the fact that such law or regulation applies and that management acknowledges and understands its responsibilities as set out in paragraph 6(b) of this Auditing Standard.  (Ref: Para. A23, A27‑A29)

If law or regulation prescribes responsibilities of management similar to those  described in paragraph 6(b) of this Auditing Standard, the auditor may determine that the law or regulation includes responsibilities that, in the auditor’s judgement, are equivalent in effect to those set out in that paragraph.  For such responsibilities that are equivalent, the auditor may use the wording of the law or regulation to describe them in the written agreement.  For those responsibilities that are not prescribed by law or regulation such that their effect is equivalent, the written agreement shall use the description in paragraph 6(b) of this Auditing Standard.  (Ref: Para. A27)

On recurring audits, the auditor shall assess whether circumstances require the terms of the audit engagement to be revised and whether there is a need to remind the entity of the existing terms of the audit engagement.  (Ref: Para. A30)

The auditor shall not agree to a change in the terms of the audit engagement where there is no reasonable justification for doing so.  (Ref: Para. A31-A33)

If, prior to completing the audit engagement, the auditor is requested to change the audit engagement to an engagement that conveys a lower level of assurance, the auditor shall determine whether there is reasonable justification for doing so.  (Ref: Para. A34-A35)

If the terms of the audit engagement are changed, the auditor and management shall agree on and record the new terms of the engagement in an engagement letter or other suitable form of written agreement.

If the auditor is unable to agree to a change of the terms of the audit engagement and is not permitted by management to continue the original audit engagement, the auditor shall: 

1. Withdraw from the audit engagement where possible under applicable law or regulation; and  
2. Determine whether there is any obligation, either contractual or otherwise, to report the circumstances to other parties, such as those charged with governance, owners or regulators.

Financial Reporting Standards Supplemented by Law or Regulation

If financial reporting standards established by an authorised or recognised standards setting organisation are supplemented by law or regulation, the auditor shall determine whether there are any conflicts between the financial reporting standards and the additional requirements.  If such conflicts exist, the auditor shall discuss with management the nature of the additional requirements and shall agree whether: 

1. The additional requirements can be met through additional disclosures in the financial report; or 
2. The description of the applicable financial reporting framework in the financial report can be amended accordingly. 

If neither of the above actions is possible, the auditor shall determine whether it will be necessary to modify the auditor’s opinion in accordance with ASA 705. ^[3] (Ref: Para. A36)

Financial Reporting Framework Prescribed by Law or Regulation—Other Matters Affecting Acceptance

If the auditor has determined that the financial reporting framework prescribed by law or regulation would be unacceptable but for the fact that it is prescribed by law or regulation, the auditor shall accept the audit engagement only if the following conditions are present: (Ref: Para. A37)

1. Management agrees to provide additional disclosures in the financial report required to avoid the financial report being misleading; and
2. It is recognised in the terms of the audit engagement that:
   1. The auditor’s report on the financial report will incorporate an Emphasis of Matter paragraph, drawing users’ attention to the additional disclosures, in accordance with ASA 706; ^[4] and 
   2. Unless the auditor is required by law or regulation to express the auditor’s opinion on the financial report by using the phrases “present fairly, in all material respects,” or “give a true and fair view” in accordance with the applicable financial reporting framework, the auditor’s opinion on the financial report will not include such phrases.

If the conditions outlined in paragraph 19 of this Auditing Standard are not present and the auditor is required by law or regulation to undertake the audit engagement, the auditor shall: 

1. Evaluate the effect of the misleading nature of the financial report on the auditor’s report; and 
2. Include appropriate reference to this matter in the terms of the audit engagement. 

Auditor’s Report Prescribed by Law or Regulation

In some cases, law or regulation of the relevant jurisdiction prescribes the layout or wording of the auditor’s report in a form or in terms that are significantly different from the requirements of the Australian Auditing Standards.  In these circumstances, the auditor shall evaluate: 

1. Whether users might misunderstand the assurance obtained from the audit of the financial report and, if so, 
2. Whether additional explanation in the auditor’s report can mitigate possible misunderstanding.^[5]

If the auditor concludes that additional explanation in the auditor’s report cannot mitigate possible misunderstanding, the auditor shall not accept the audit engagement, unless required by law or regulation to do so.  An audit conducted in accordance with such law or regulation does not comply with Australian Auditing Standards.  Accordingly, the auditor shall not include any reference within the auditor’s report to the audit having been conducted in accordance with Australian Auditing Standards.^[6]  (Ref: Para. A38‑A39)