As a contract between an auditor and their client, the audit engagement letter is important for mitigating risk related to the arrangement. This article covers the circumstances under which an engagement letter should be issued, how to prepare an audit engagement letter, and required and recommended audit engagement terms to include.
The purpose of an audit engagement letter is to clarify and communicate the scope of work that will be completed during the audit, including what tests, procedures and analyses are expected to be performed. It also includes a timeline for the audit and associated deliverables, and it defines the terms of the engagement. The letter should also specify what services will be provided, such as filing tax returns, consulting or advising clients on their internal controls, and it must explain how fees are calculated. The letter should end by asking that management confirm in writing its agreement to the terms of the engagement.
Depending on the auditing standards in place, certain terms for an engagement may be non-negotiable. These typically include terms that specify management’s obligation to submit assertions and representations relative to the control environment, inherent limitations of an examination engagement and responsibilities of each of the engaging parties.
Having a solid audit engagement letter is an important part of protecting your firm’s reputation. It clarifies responsibilities, reduces the risk of misunderstandings and provides an easy reference point when it comes to ensuring that you meet all regulatory requirements. It also helps to ensure that there is no surprise when it comes to the release of results or the delivery date for an invoice.