What are Terms of Engagement?
ISA 210.9 establishes a two-stage process. First, the auditor confirms the preconditions for an audit exist (ISA 210.6). Only then does the auditor proceed to agree the terms of the engagement. The two stages are sequential — jumping to agreeing terms without confirming preconditions skips the first stage entirely.
ISA 210.6 requires two preconditions: (1) the financial reporting framework to be used in preparing the financial statements is acceptable, and (2) management acknowledges its responsibilities — for the preparation of the financial statements, for internal control sufficient to prepare statements free from material misstatement, and for providing the auditor with unrestricted access to all relevant information.
ISA 210.10 sets the minimum content the agreed terms must cover. The terms may span multiple documents beyond the engagement letter itself. Fee arrangements, practical access conditions, and data handling agreements may form part of the overall terms without being in the engagement letter.
ISA 210.13 requires annual reassessment on recurring engagements. The auditor must consider whether circumstances require the terms to be revised and whether there is a need to remind the entity of the existing terms. This assessment must be documented regardless of outcome.
Key Points
- Two-stage process: confirm preconditions first (ISA 210.6), then agree terms (ISA 210.9).
- Terms are the substance; the engagement letter is one vehicle for recording them.
- Terms may span multiple documents — fee arrangements and access conditions can sit separately.
- Annual reassessment is required on recurring engagements (ISA 210.13) — document the assessment even when nothing changes.
Why it matters in practice
The most common gap is no documented ISA 210.13 reassessment on recurring engagements. The file carries forward last year's engagement letter with no evidence that the auditor considered whether circumstances changed. A new subsidiary, a change in reporting framework, a shift in governance structure — any of these should trigger a reassessment of whether existing terms remain appropriate.
Practitioners sometimes treat the engagement letter as the entirety of the terms. In practice, the agreed conditions for the audit may include separate fee agreements, data access protocols, or supplementary letters addressing specific scope items. The file should make clear what the complete set of agreed terms comprises.
Skipping the preconditions stage is a structural gap. If the file shows terms were agreed without evidence that the auditor assessed whether the reporting framework is acceptable and whether management acknowledged its responsibilities, the two-stage process under ISA 210.9 was not followed.
Key standard references
- ISA 210.9: The two-stage process — preconditions first, then agreement of terms.
- ISA 210.6: Preconditions for an audit — acceptable framework and management acknowledgment.
- ISA 210.10: Minimum content required in the agreed terms.
- ISA 210.13: Reassessment of terms on recurring engagements.
Related terms
Frequently asked questions
What is the difference between terms of engagement and the engagement letter?
The terms are the substance — the agreed conditions for the audit. The engagement letter is the vehicle that records them. The full set of agreed terms may span multiple documents including fee arrangements and practical access conditions.
What are preconditions for an audit?
ISA 210.6 requires two preconditions before terms can be agreed: (1) the financial reporting framework is acceptable, and (2) management acknowledges its responsibilities for the financial statements and for providing unrestricted access to information.