What are terms of engagement?
On recurring engagements, last year's engagement letter often rolls forward untouched. The file carries the same PDF from three years ago and nobody checks whether the reporting framework changed or whether the preconditions assessment still holds. That gap is exactly what ISA 210 is designed to prevent.
Terms of engagement are the agreed conditions under which an audit is performed, covering objective, scope, responsibilities on both sides, and the applicable financial reporting framework. ISA 210.9 establishes a two-stage process: first, confirm the preconditions for an audit exist ( ISA 210.6 ), then agree the terms. 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 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, for providing the auditor with unrestricted access to all relevant information, and (where applicable) for supplementary disclosures beyond the framework's minimum requirements.
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 and practical access conditions 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's a need to remind the entity of the existing terms. This assessment must be documented regardless of outcome. Going SALY with a methodology shield (copying last year's letter and assuming the boilerplate covers you) doesn't satisfy the standard.
Key Points
- Confirm preconditions first ( ISA 210.6 ), then agree terms ( ISA 210.9 ). The two stages are sequential.
- 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 or a change in reporting framework should trigger a reassessment of whether existing terms remain appropriate. So should a shift in governance structure or a change in group composition.
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 and data access protocols alongside supplementary letters addressing specific scope items. The file should tell a story: what the complete set of agreed terms comprises and why those terms are appropriate for this engagement.
Skipping the preconditions stage is a structural gap, and it's the one that's hardest to fix after the fact. 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 wasn't followed. No amount of subsequent documentation can retrospectively create a preconditions assessment that should have happened before the engagement started.
Key standard references
- ISA 210.9 sets the two-stage process (preconditions first, then agreement of terms).
- ISA 210.6 defines preconditions for an audit (acceptable framework and management acknowledgment).
- ISA 210.10 sets minimum content required in the agreed terms.
- ISA 210.13 requires reassessment of terms on recurring engagements.
Related terms
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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.