It can be said that if preconditions of an Audit is not satisfied, the Auditor could not engaged in the Audit. Therefore all preconditions of an audit must be evaluated before accepting an audit client.

In simple words, “Preconditions” of an audit encompass basis of financial statement preparation and Management’s responsibilities in preparing financial statement.

According to [ISA 210.6], it is said that:

Preconditions of an Audit are critically important because those conditions determine feasibility of an Audit. Each of those is addressed below:

1. Applied financial reporting frameworks

If the auditor determines that the financial reporting framework to be applied in preparation of financial statements is unacceptable, the auditor could not engage in the audit (reject the audit from beginning). [ISA 210.8].

If the applied financial reporting framework is unacceptable, it means the financial statements (subject of the audit) is not presented truly and fairly in all material aspects for users of financial statements. The unacceptability of the framework also prevent auditor from collecting appropriate audit evidence to form his opinion on the financial statements.

Factors that are relevant for auditor to determine the acceptability of financial reporting framework are as following:

- The nature of audited client (eg. whether it is a business enterprise, a public sector entity or a not-for-profit organization);

- The purpose of financial statements (eg. whether they are prepared to meet financial information needs of a wide range of users or for specific users);

- The nature of financial statements (eg. whether the FSs are completed set of FSs or just a single FS).

- Whether law or regulation prescribe the applicable financial reporting framework.

Financial statements which are prepared to meet common financial information needs of a wide range of users are referred to as “general purposes financial statements”.

While those prepared for needs of specific users are called “specific purpose financial statements”.

In some jurisdiction, law or regulation may prescribe the financial reporting framework to be used in preparation of general purposes financial statements for certain type of entities. In the absence of indicators to the contrary, such a financial reporting framework is presumed to be acceptable for general purpose FSs prepared by such companies.

2. Acknowledgement of the audit company’s Management responsibilities on FS preparation

Financial statements are subject of an audit and those statements must be prepared by the audited company. If Management of the company did not perform and acknowledge its responsibilities in this aspect, the audit could not be conducted because the subject of an audit is unavailable.

3. Acknowledgement of the audited company’s Management responsibilities on ensuring internal control to prepare FSs.

Management must maintain such internal control as it determines is necessary (rather than a level of high effectiveness) to enable the preparation of FSs that are free from material misstatement, whether due to fraud or error. Internal control, no matter how effective, can provide an entity and user of FSs with only reasonable assurance about achieving the entity’s financial reporting objectives due to inherent limitation of the internal control and the audit itself.

4. Acknowledgement of the audited company’s Management responsibilities to allow auditor to access with necessary resources during course of the audit.

If management precludes the auditor to access to any data, personnel which involved in and/or has material impacts to financial statements, the auditor could not obtain sufficient appropriate audit evidences to form his opinion. Therefore the auditor could not accept the audit engagement.

References

- ISA 210 Agreeing the terms of audit engagements