An engagement letter is a document that serves as a contract between an auditor and a client. It defines the scope of the audit, the client’s responsibilities, and the auditor’s fee among other things. The purpose of an engagement letter is to mitigate risk and misunderstandings between the parties by clearly setting expectations for the business arrangement.
The purpose of the letter is to document the arrangement between the client and the auditor, thereby reducing the likelihood of conflict or misunderstanding. Specifically, the letter identifies the entity to be audited or reviewed, the type of financial statements to be audited or reviewed and a description of the audit objectives. In addition, it specifies the extent of the audit and indicates whether management is responsible for detecting fraud or irregularities.
Additionally, an engagement letter should contain provisions for the auditor’s fees and a brief discussion of the basis for those fees. This includes billing rates for professional staff and partners, travel expenses, other direct costs, and a provision that the fees are not contingent on the discovery of fraud or irregularities.
The auditor should send the letter to the entity after verbal confirmation of appointment, but preferably before commencement of the audit. The auditor should also send it to existing clients if they have not previously received an engagement letter or if circumstances indicate the need to revise the terms of an existing engagement. An auditor should consider a request to change the terms of an engagement to one that provides a lower level of assurance on the basis that a lower level of assurance would be appropriate to the circumstances. what is an engagement letter in auditing