An engagement letter is a formal, written agreement between an auditor and a client that outlines the scope, objectives, and terms of the audit engagement. The engagement letter serves as a contract and establishes a clear understanding between both parties regarding the nature and extent of the services to be provided, the responsibilities of each party, and any other conditions or limitations related to the audit.
Key elements of an engagement letter typically include:
- Objectives of the audit: The engagement letter should clearly state the purpose of the audit, such as providing an independent opinion on the client’s financial statements in accordance with applicable accounting and auditing standards.
- Scope of the audit: The engagement letter should define the scope of the audit, including the financial statements and periods to be audited, and the applicable financial reporting framework.
- Responsibilities of the auditor: The engagement letter should outline the auditor’s responsibilities, such as conducting the audit in accordance with relevant auditing standards, obtaining sufficient appropriate audit evidence, and maintaining professional skepticism and independence.
- Responsibilities of the client: The engagement letter should specify the client’s responsibilities, such as providing access to all necessary information, records, and personnel, preparing the financial statements in accordance with the applicable financial reporting framework, and maintaining an effective system of internal control.
- Limitations of the audit: The engagement letter should clarify that an audit is not designed to detect all instances of fraud or error and that it cannot provide absolute assurance regarding the accuracy of the financial statements.
- Audit fees and billing arrangements: The engagement letter should detail the basis for determining the audit fees and any billing arrangements, such as payment terms and the invoicing schedule.
- Confidentiality and data protection: The engagement letter should address the auditor’s obligations to maintain the confidentiality of client information and comply with applicable data protection regulations.
- Other terms and conditions: The engagement letter may also include other terms and conditions, such as dispute resolution procedures, indemnification clauses, or provisions related to the use of the auditor’s work by third parties.
Both the auditor and the client should sign the engagement letter to acknowledge their agreement with the terms and conditions specified. The engagement letter is an essential part of the audit process, as it helps to avoid misunderstandings, manage expectations, and provide a legal basis for the professional relationship between the auditor and the client.