Draft Guidance Note – FAIS 220 : Engagement Acceptance and Appointment

Guidance Note For Forensic Accounting And Investigation Standard No. 220 On Engagement Acceptance And Appointment are to assist the Professional in: (a) Conducting preliminary procedures and due diligence to better understand the conditions of appointment prior to acceptance of the engagement. (b) Document key terms of the engagement, as agreed with the Primary Stakeholder (the appointing authority) in the form of a formal Engagement or Appointment Letter. The GN also provides examples and illustrations to help the Professional apply similar work procedures which may be relevant to the circumstances of the engagement.

Digital Accounting Assurance Board
The Institute of Chartered Accountants of India
1st June, 2023

GUIDANCE NOTE FOR FORENSIC ACCOUNTING AND INVESTIGATION STANDARD NO. 220 ON ENGAGEMENT ACCEPTANCE AND APPOINTMENT

EXPOSURE DRAFT Approved by DAAB (On 1 June’23) 

This Guidance Note provides technical clarifications and implementation guidance on how to prepare for and conduct work procedures on Forensic Accounting and Investigation Standard Number 220, on “Engagement Acceptance and Appointment” issued by the Institute of Chartered Accountants of India (ICAI) and should be read in conjunction with all the Standards relevant to the topic. The contents of this Guidance Note are recommendatory in nature and do not represent the official position of the ICAI. The reader is advised to apply his best Professional judgement in the application of this Guidance Note considering the relevant context and prevailing circumstances.

1.0 Introduction

1.1 Forensic Accounting and Investigation Standard (FAIS) 220 on “Engagement Acceptance and Appointment” deals with the responsibility of the Professional prior to agreeing with the terms of the engagement during appointment.

1.2 Since Forensic Accounting and Investigation (FAI) engagements are inherent with a degree of sensitivity and associated risk, the Professional is expected to perform certain preliminary procedures and due diligence regarding the proposed engagements prior to committing to undertake those engagements.

2.0 Objectives

2.1 The objectives of this Guidance Note (GN) are to assist the Professional in:

(a) Conducting preliminary procedures and due diligence to better understand the conditions of appointment prior to acceptance of the engagement.

(b) Document key terms of the engagement, as agreed with the Primary Stakeholder (the appointing authority) in the form of a formal Engagement or Appointment Letter.

2.2 The GN also provides examples and illustrations to help the Professional apply similar work procedures which may be relevant to the circumstances of the engagement.

3.0 Procedures

3.1 A Professional, when undertaking pre-engagement procedures, may wish to undertake an understanding of the client and the engagement. This GN outlines certain suggested procedures which may be performed by the Professional in this regard.

3.2 The purpose of conducting such procedures is outlined in the Standard, primarily to understand the nature and complexity of the engagement and to assess the ability of the Professional to undertake the engagement. The Professional is also expected to assess the inherent risks of accepting the engagement.

3.3 The Professional would seek to obtain sufficient information about the engagement to make an informed acceptance decision. Also, the Professional may wish to consider the risk mitigations options available where there are applicable.

GN 220: ENGAGEMENT ACCEPTANCE AND APPOINTMENT Page 2 of 8

3.4 Based on the outcome of the evaluation, the Professional may consider proceeding ahead with the engagement. Possible mitigation steps that may be considered during acceptance include:

• Limiting the types of services that the Professional agrees to perform.
• Additional engagement oversight or adequate staffing for the engagement.

3.5 Independence Check and Conflict of Interest: Independence is essential where the prospective client is already an audit or assurance client of the Professional since it may create perceived conflict of interest situations. Therefore, the Professional may take appropriate steps to identify, mitigate and manage any potential conflicts of interest which may arise before, during or after the commencement of an engagement. Conflict of interest creates perceived threats towards the basic principle of objectivity and may also create threats with other fundamental principles as well.

3.6 Continuous evaluation: Sometimes, the Professional is empanelled ahead of time on a contractual or retainer basis, and needs to be prepared to take on engagement at short notice due to their urgency. At those times, a continuous evaluation (or re-evaluation) may be required in an on-going basis. This can also be performed for existing clients whenever a significant change is identified, and which may impact the risk profile of the client.

3.7 Engagement evaluation involves a decision as to whether the Professional:

• Has the necessary resources and skills to perform the specific engagement.
• Is willing to accept the risks the engagement presents.
• Is willing to source third party experts to perform part of the engagement, where appropriate.

3.8 Engagement Team Composition: The Professional is responsible to perform the engagement in accordance with professional standards along with regulatory and legal requirements. The important element in achieving this are the qualifications and experience of the team as a whole, rather than any one individual. Considerations for the assessment of the engagement team include:

• The understanding and experience of the team with engagements of a similar nature and complexity as well as with applicable policies, professional standards and regulatory and legal requirements.
• Technical and industry knowledge of the team.
• Ability of the team to apply professional judgment on the engagement.
• The fitment of the individuals as part of the team member is an important consideration and may be incorporated as part of the team composition evaluation.

3.9 Engagement Letter: When the decision is made to accept an engagement, the Primary Stakeholder and the Professional sign a contract detailing the scope of the work the Professional is to perform.

3.10 An engagement contract is the result of discussion and agreement between the Professional and the Primary Stakeholder detailing the purpose of the work, how the work will be performed (including the responsibilities of both parties), what output will be generated and delivered, the engagement timelines and the terms and conditions that will apply to the performance of that work. The contract is designed to provide clarity regarding the engagement and serves to manage and clarify the prospective client’s requirements and the Professionals’ responsibilities.

3.11 An Illustration of a Typical Engagement letter and its form and content is presented as Annexure A.

4.0 Annexures

ANNEXURE A: Engagement Letter Format & content

A. Identity of Contracting Professional

Include Professional name

The engagement contract needs to clearly identify the Professional.

B. Identity of the Prospective Client

Specify the client’s name in the engagement contract	The prospective client is a legal entity that: Professional is doing work for and issuing report to; Is bound by the engagement contract and its obligations. This entity needs to be specified as a party to the engagement contract to bind it to the terms.
Identify all relevant prospective client entities	Pay attention to who may be named in the engagement contract as the prospective client when there is: A group of companies; or related entities More than one organisation obtaining the benefit of the services All parties to the contract are identified to be bound by it.

C. Scope of Engagement

Scope must reflect what was agreed	The scope and the purpose of the Professional’s involvement need to be discussed and agreed with the client prior to the engagement contract is finalised.
Description of scope	The description of the scope of work in an engagement contract needs to be: Clear and unambiguous as to what the Professional will do; Clear and unambiguous as to what the Professional will not do The manner in which the work will be performed and the means by which any relevant information will be gathered;
Avoid vague terms	Avoid words/terms which lack clear definitions and which may create ambiguity to describe the work the Professional plans to perform. Give due consideration to describe the broad procedures which the Professional intents to undertake during the course of the engagement. Example: If the Professional is to perform “a review,” then the engagement contract scope may explain: How the review will be performed (brief procedures); Any professional standards that apply. Avoid using the word ‘ensure’ ‘comply’ or any other term that indicates the services can achieve a specific result for the prospective client. The Professional will vusually “share” the evidence gathered or “report” the findings. In that case, responsibility for actions taken or decisions made by the client remains with the client. This may be made clear in the engagement contract.
Legal limitations	The Professional may refer to the following in the engagement contract, if they affect the work to be performed or the deliverables: Laws and Regulations. Professional Standards. Additionally, the Professional may take into consideration that any limitations they place on the extent of work or deliverables are documented in the engagement contract.

D. Description of Deliverables

Clearly define deliverables

A description of the deliverables and their forms will often be included within the scope of the engagement. Define the engagement deliverables clearly. Manage the prospective client’s expectations so that the client is aware of what the deliverable will contain and any limitations on that content. The nature of the deliverable must be made clear; that is, whether the deliverable will be: A written report (including preliminary, interim, final reports, as agreed with the client). A presentation. Any other form (example: a training/awareness session in person or in virtual mode).

E. Timetable

Clearly documented milestones

Clearly document the specific timetable for undertaking and completing the work agreed upon with the client. Also list any interim milestones that the Professional is expected to meet.

F. Responsibilities of the Client

Overview

Explicitly state the responsibilities of the prospective client for: Providing information; physical access, IT access Assisting the Professional when sought for Making specific decisions to facilitate the assignment

Examples for client responsibilities

For example, the contract might state that the prospective client: Provides information promptly as and when requested or within an adequate time period Gives access to its locations and personnel; Accepts responsibility for certain tasks; Agrees to make representations as required by the Professional Warrants that use of equipment or other property belonging to the client does not infringe on intellectual property rights of any third party.

G. Using Client confidential information for other purposes

Clear responsibilities as to confidentiality

The engagement contract may be clear that the Professional is permitted to disclose information as required by law, regulation and other Professional standards. Wherever not mandated by law confidential information will be shared only after prior consent of the prospective client

H. Fees or Description of Fee Arrangements

Fee details	The following may be detailed in the contract: The fee including the basis (in case it is to vary) Frequency of billing Payment arrangements Currency in which payment is required Representations before the Competent Authorities (if applicable)
Expense recovery clause	The engagement contract may also include mechanisms for recovery of expenses, legal damages, OPE (out-of-pocket expenses), etc.
Taxes	The engagement contract may be clear on payment of taxes e.g., GST on expenses and whether amounts are net or gross of tax. Where work is carried out in a foreign country or for a foreign client, carefully address the tax implications, e.g., Exposure to foreign withholding, personal or income taxes; VAT/ IGST.

I. Governing Laws and Jurisdiction

Law and jurisdiction clearly stated

The contract may make clear which: Jurisdictional Law governs the agreement. Jurisdiction to bring claims to, between parties to the contract. In some cases, it will also address different mechanisms for dispute resolution.

J. Termination

Right of termination

An engagement contract includes a termination clause to describe: How the Professional or the client may bring the contract to an end whether early or otherwise. If considered necessary, what consequences will follow, including recovery of fees to the extent of work performed. Force Majeure clauses.

K. Engagement Team

Team leader	State who /what profile will be leading the team that will undertake the work for the prospective client.
Other Team Members	State the team lead/s and state that the team lead/s would be assisted by other team-members as may be required for the engagement.

L. Restrictions on use of deliverables (where permissible)

Restricts unauthorized use of reports and deliverables

The engagement contract may prevent the prospective client from making unauthorized use of Professional’s reports and deliverables. A clause may also be included in the contract, where permissible, to restrict the circulation of deliverables provided to the client.

M. Use of Third-Party resources

Third party resources

Where it is intended that a third party to be used on an engagement, the prospective client’s consent may need to be obtained through the wording of the engagement contract.

N. Use of e-mails or other modes of communication

Use of e-mails or other modes of communication

It is recommended that the Professional may seek the consent of prospective clients to the use of e-mail or any other form of communication.

O. Signature of Contracting Parties

Client and Professional signature

Both the client and the Professional sign or otherwise formally agree on the engagement contract. Depending on applicable law and jurisdiction electronic signature may be sufficient.