Engagement letter
Auditors agree with the client, in writing, about the scope,
terms and conditions of the audit engagement. This written
communication is referred to as an engagement letter. The letter is usually addressed to chairman/woman of the audit committee or, in the case of a corporation, the chair of the board of directors, with a copy being sent to the audit committee. A pprimary purpose
of such a letter is to minimize any possible misunderstanding
concerning the scope and terms of the audit engagement.
Possible areas of misunderstanding include:
- the objective of the audit of the financial statements.
- the extent to which reliance may be placed on the audited
financial statements.
- with whom the responsibility for the preparation of the
financial statements rests.
- the extent to which the auditor has a right to unhindered
access to accounting and other records necessary to form an opinion
on the financial statements.
- the extent to which the auditor is responsible for detecting
fraud and (other) misstatements.
- the extent to which the auditor is responsible for reporting
weaknesses in internal control procedures.
- the extent to which the auditor is responsible for reporting
deficiencies in operating procedures.
- the amount of the audit fee and when it is payable.
The letter is sent to all new audit clients and where there has
been a change in the terms of the engagement or the auditor
considers that management may not understand the existing terms of
the engagement, the letter is also sent to continuing clients. See
example.
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