What is Audit Engagement Letter

The auditor and the client should agree on the terms of

the engagement. The agreed terms would need to be recorded in
an audit engagement letter or other suitable form of contract. This
ISA is intended to assist the auditor in the preparation
of engagement letters relating to audits of financial statements.

Definition:
An engagement letter is a written agreement that defines the legal
relationship between a client and professional company. The
letter details the terms, conditions, and compensation
arrangement of the professional relationship.

Use of The Letter:

It is in the interest of both client and auditor that the auditor sends
an engagement letter, preferably before the commencement of
the engagement, to help in avoiding misunderstandings with
respect to the engagement. The engagement letter documents
and confirms the auditor’s acceptance of the appointment, the
objective and scope of the audit, the extent of the auditor’s
responsibilities to the client and the form of any reports.
Format of Audit engagement letter
 Addressee: Typically addressed to the senior management (e.g. CEO) of
the client.
 Identification of the service to be rendered: One type of service is a
financial statement audit. Provided in this section is a brief description of
the nature of the particular service. Other services that are planned for the
audit (e.g. evaluation of internal control, preparation of regulatory reports)
are also identified in this section.
 Specification of the responsibilities of the auditor of the company: This
section refers to the specific professional standards and responsibilities of
the auditor.
 Constraints on the accounting firm: For example, timing of access to client
facilities and accounting records may delay the engagement.
 Deadlines: This section lays out the estimated date of completion and
release of the financial statements, as well as the general guidelines for
the timing of the audit work.
 Description of any assistance to be provided by the client: Typically, the
client’s personnel will prepare some schedules (e.g. bank reconciliations)
and retrieve documents from files. The letter should describe the
assistance of client personnel. If the assistance is not provided and the
auditors must complete the work themselves, this section of the letter
would provide justification for additional fees to the client.
 Interactions with specialists, internal auditors, and the predecessor auditor
needed to conduct the audit: Some specialists needed on an audit may
include engineers to verify the stage of completion of electronic
components, real estate appraisers to appraise realizable value of real
estate used as collateral for loans, actuaries to evaluate the funding
requirements and future cash flows associated with pensions or post-
retirement health costs, and attorneys to evaluate the likely disposition of
contingent losses arising from litigation.
 A disclaimer: Describing the limits of the audit. Typically this expresses that
an audit is not designed to detect all forms of fraud or illegal acts; rather,
an audit checks the financial position of a client with reference to generally
accepted accounting principles.
 A description of the basis for fees: This may include a fixed fee or an
estimate of fees based on expected completion time and billing rates of
firm employees assigned to the engagement.
 Ownership and accessibility of the auditor’s files to external parties.