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3012 Preconditions for a Direct Engagement
Jul-2020
Overview
This section covers the CSAE requirements related to
- preconditions for a direct engagement (including necessary characteristics of a direct engagement, and roles and responsibilities of the appropriate parties); and
- what is expected of the practitioner if the preconditions are not present.
CSAE 3001 Requirements
26. In order to establish whether the preconditions for a direct engagement are present, the practitioner shall, on the basis of a preliminary knowledge of the engagement circumstances and discussion with the appropriate party(ies), determine whether: (Ref: Para. A35–A37)
(a) The roles and responsibilities of the appropriate parties are suitable in the circumstances; and (Ref: Para. A37)
(b) The engagement exhibits all of the following characteristics:
(i) The underlying subject matter is appropriate; (Ref: Para. A38-A42)
(ii) The criteria that the practitioner expects to be applied are suitable for the engagement circumstances, including that they exhibit the following characteristics: (Ref: Para. A43-A48)
a. Relevance.
b. Completeness.
c. Reliability.
d. Neutrality.
e. Understandability.
(iii) The criteria that the practitioner expects to be applied will be available to the intended users; (Ref: Para. A49-A50)
(iv) The practitioner expects to be able to obtain the evidence needed to support the practitioner’s conclusion; (Ref: Para. A51-A53)
(v) The practitioner’s conclusion, in the form appropriate to either a reasonable assurance engagement or a limited assurance engagement, is to be contained in a written report; and
(vi) A rational purpose including, in the case of a limited assurance engagement, that the practitioner expects to be able to obtain a meaningful level of assurance. (Ref: Para. A54)
27. If the preconditions for a direct engagement are not present, the practitioner shall discuss the matter with the engaging party. If changes cannot be made to meet the preconditions, the practitioner shall not accept the engagement as an assurance engagement unless required by law or regulation to do so. However, an engagement conducted under such circumstances does not comply with CSAEs. Accordingly, the practitioner shall not include any reference within the assurance report to the engagement having been conducted in accordance with this CSAE or any other CSAE(s).
CSAE 3001 Application Material
Preconditions for the Direct Engagement (Ref: Para. 26)
A35. In a public sector environment, some of the preconditions for an assurance engagement may be assumed to be present, for example:
(a) The roles and responsibilities of public sector audit organizations and the government entities scoped into assurance engagements are assumed to be appropriate because they are generally set out in legislation;
(b) Public sector audit organizations’ right of access to the information necessary to perform the engagement is often set out in legislation;
(c) The practitioner’s conclusion, in the form appropriate to either a reasonable assurance engagement or a limited assurance engagement, is generally required by legislation to be contained in a written report; and
(d) A rational purpose is generally present because the engagement is set out in legislation.
A36. If suitable criteria are not available for all of the underlying subject matter but the practitioner can identify one or more aspects of the underlying subject matter for which those criteria are suitable, then an assurance engagement can be performed with respect to that aspect of the underlying subject matter in its own right. In such cases, the assurance report may need to clarify that the report does not relate to the original underlying subject matter in its entirety.
Roles and Responsibilities (Ref: Para. 14(n), 14(q), 14(u), 15, 26(a), Appendix 1)
A37. All assurance engagements have at least three parties: the responsible party, the practitioner, and the intended users.
Appropriateness of the Underlying Subject Matter (Ref: Para. 26(b)(ii))
A38. An appropriate underlying subject matter is identifiable and capable of consistent measurement or evaluation against the applicable criteria and can be subjected to procedures for obtaining sufficient appropriate evidence to support a reasonable assurance or limited assurance conclusion, as appropriate.
A39. The appropriateness of an underlying subject matter is not affected by the level of assurance; that is, if an underlying subject matter is not appropriate for a reasonable assurance engagement, it is also not appropriate for a limited assurance engagement, and vice versa.
A40. Different underlying subject matters have different characteristics, including the degree to which information about them is qualitative versus quantitative, objective versus subjective, historical versus prospective, and relates to a point in time or covers a period. Such characteristics affect the:
(a) Precision with which the underlying subject matter can be measured or evaluated against criteria; and
(b) The persuasiveness of available evidence.
A41. Identifying such characteristics and considering their effects assist the practitioner when assessing the appropriateness of the underlying subject matter and also in determining the content of the assurance report (see paragraph A164).
A42. In some cases, the assurance engagement may relate to only one part of a broader underlying subject matter. For example, the practitioner may be engaged to report on one aspect of an entity’s contribution to sustainable development, such as a number of programs run by an entity that have positive environmental outcomes. In determining whether the engagement exhibits the characteristic of having an appropriate underlying subject matter in such cases, it may be appropriate for the practitioner to consider whether the practitioner’s report is likely to meet the information needs of intended users as a group, and whether there are more significant programs with less favorable outcomes that the entity has not asked the practitioner to report upon.
Suitability of the criteria (Ref: Para. 26(b)(ii))
A43. Suitable criteria exhibit the following characteristics:
(a) Relevance: Relevant criteria result in a practitioner’s report that assists decision-making by the intended users.
(b) Completeness: Criteria are complete when they do not omit relevant factors that could reasonably be expected to affect decisions of the intended users. Complete criteria include, where relevant, benchmarks for presentation and disclosure.
(c) Reliability: Reliable criteria allow reasonably consistent measurement or evaluation of the underlying subject matter when used in similar circumstances by different practitioners.
(d) Neutrality: Neutral criteria result in in a practitioner’s report that is free from bias as appropriate in the engagement circumstances.
(e) Understandability: Understandable criteria result in a practitioner’s report that can be understood by the intended users.
A44. Vague descriptions of expectations or judgments of an individual’s experiences do not constitute suitable criteria.
A45. The suitability of criteria for a particular engagement depends on whether they reflect the above characteristics. The relative importance of each characteristic to a particular engagement is a matter of professional judgment. Further, criteria may be suitable for a particular set of engagement circumstances, but may not be suitable for a different set of engagement circumstances. For example, reporting to governments or regulators may require the use of a particular set of criteria, but these criteria may not be suitable for a broader group of users.
A46. Criteria can be selected or developed in a variety of ways, for example, they may be:
- Embodied in law or regulation.
- Issued by authorized or recognized bodies of experts that follow a transparent due process.
- Developed collectively by a group that does not follow a transparent due process.
- Published in scholarly journals or books.
- Developed for sale on a proprietary basis.
- Specifically designed for the purpose of measuring or evaluating the underlying subject matter in the particular circumstances of the engagement.
How criteria are developed may affect the work that the practitioner carries out to assess their suitability.
A47. In some cases, law or regulation prescribe the criteria to be used for the engagement. In the absence of indications to the contrary, such criteria are presumed to be suitable, as are criteria issued by authorized or recognized bodies of experts that follow a transparent due process if they are relevant to the intended users’ information needs. Such criteria are known as established criteria. Even when established criteria exist for an underlying subject matter, specific users may agree to other criteria for their specific purposes. For example, various frameworks can be used as established criteria for evaluating the effectiveness of internal control. Specific users may, however, develop a more detailed set of criteria that meet their specific information needs in relation to, for example, prudential supervision. In such cases, the assurance report may note, when it is relevant to the circumstances of the engagement, that the criteria are not embodied in law or regulation, or issued by authorized or recognized bodies of experts that follow a transparent due process.
A48. If criteria are specifically designed for measuring and evaluating the underlying subject matter in the particular circumstances of the engagement, they are not suitable if they result in an assurance report that is misleading to the intended users.
Availability of the criteria (Ref: Para. 26(b)(iii))
A49. Criteria need to be available to the intended users to allow them to understand how the underlying subject matter has been measured or evaluated. Criteria are made available to the intended users in one or more of the following ways:
(a) Publicly.
(b) Through inclusion in a clear manner in the assurance report (see paragraph A164).
(c) By general understanding, for example, the criterion for measuring time in hours and minutes.
A50. Criteria may also be available only to intended users, for example, the terms of a contract, or criteria issued by an industry association that are available only to those in the industry because they are relevant only to a specific purpose. The practitioner may consider it appropriate to indicate that the assurance report is intended solely for specific users.
Access to Evidence (Ref: Para. 26(b)(iv))
Quantity and quality of available evidence
A51. The quantity or quality of available evidence is affected by:
(a) The characteristics of the underlying subject matter. For example, less objective evidence might be expected when the underlying subject matter deals with matters that are future oriented rather than historical; and
(b) Other circumstances, such as when evidence that could reasonably be expected to exist is not available because of, for example, the timing of the practitioner’s appointment, an entity’s document retention policy, inadequate information systems, or a restriction imposed by the responsible party.
Ordinarily, evidence will be persuasive rather than conclusive.
Access to records (Ref: Para. 61)
A52. Seeking the agreement of the appropriate party(ies) that it acknowledges and understands its responsibility to provide the practitioner with the following may assist the practitioner in determining whether the engagement exhibits the characteristic of access to evidence:
(a) Access to all information of which the appropriate party(ies) is aware that is relevant to the engagement, such as records, documentation and other matters;
(b) Additional information that the practitioner may request from the appropriate party(ies) for the purpose of the engagement; and
(c) Unrestricted access to persons from the appropriate party(ies) from whom the practitioner determines it necessary to obtain evidence.
A53. The nature of relationships between the responsible party and the engaging party may affect the practitioner’s ability to access records, documentation and other information the practitioner may require as evidence to complete the engagement. The nature of such relationships may therefore be a relevant consideration when determining whether or not to accept the engagement. Examples of some circumstances in which the nature of these relationships may be problematic are included in paragraph A140.
A Rational Purpose (Ref: Para. 26(b)(vi))
A54. In determining whether the engagement has a rational purpose, relevant considerations may include the following:
- The intended users of the assurance report (particularly when the criteria are designed for a special purpose). A further consideration is the likelihood that the assurance report will be used or distributed more broadly than to intended users.
- Whether aspects of the underlying subject matter are expected to be excluded from the assurance engagement, and the reason for their exclusion.
- The characteristics of the relationships between the responsible party and the engaging party, whether the responsible party consents to the use to be made of the practitioner’s report and whether it will have the opportunity to review that report before it is made available to intended users.
- Whether the practitioner discussed the criteria to be applied to measure or evaluate the underlying subject matter with other parties, and what the degree of judgment is in applying them. The engagement is more likely to have a rational purpose if the intended users were involved in selecting the criteria.
- Any significant limitations on the scope of the practitioner’s work.
- Whether the practitioner believes the engaging party intends to associate the practitioner’s name with the underlying subject matter in an inappropriate manner.
OAG Guidance
What CSAE 3001 means for preconditions for conducting a direct engagement
Paragraph 26 of CSAE 3001 establishes the preconditions for a direct engagement. In a performance audit conducted in the public sector, there may be situations when the preconditions are not present. For example, during the early planning of the audit, the audit team may determine that there are no suitable criteria for the engagement circumstances. In these situations, options the audit team may consider include:
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Redefining the terms of the performance audit to meet the preconditions (for example, by refining the audit topic such that suitable criteria can be identified); or
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Complying with paragraph 27 of CSAE 3001 if changes cannot be made to meet the preconditions.
Paragraph 26(a) of CSAE 3001 requires the audit team to determine whether the roles and responsibilities of the entities are suitable in the circumstances. The roles and responsibilities of government entities scoped into the performance audit may be assumed to be appropriate because they are generally set out in legislation. However, even though they are assumed to be appropriate, there may be a lack of clarity with respect to roles and responsibilities, such as overlapping roles and shared responsibilities. When there is a lack of clarity, the audit team may consider the impact on planning, conducting and reporting the performance audit.
Paragraph 26(b) of CSAE 3001 requires the audit team, on the basis of a preliminary knowledge of the engagement circumstances and discussions with the entity(ies), to determine whether the underlying subject matter is appropriate, and whether the criteria that the audit team expects to be applied are suitable for the engagement circumstances. The preliminary knowledge of the engagement circumstances also informs the audit objective and scope, identifying and assessing the suitability of criteria, and determining whether the practitioner expects to be able to obtain the evidence needed to support the practitioner’s conclusion.