An engagement letter is an important tool for clarifying expectations and minimizing misunderstandings during the audit process. This article discusses what an engagement letter is, when it should be issued and how to prepare one. It also covers the required and recommended audit engagement terms to include in the document.
An audit engagement letter is an agreement between a client and auditor defining the scope of the work to be performed. It also identifies the audit’s objectives, the timeline within which the audit is to be completed and the professional fee structure. An effective engagement letter is a critical part of any auditing arrangement and should be sent as soon as possible, preferably before the start of the audit work. It is especially important when dealing with new clients and is essential in situations where there has been a significant change of personnel or those responsible for governance of the client.
From the auditor’s perspective an engagement letter prevents “scope creep” – that is, it defines boundaries around what services are due to be provided. It can also provide guidance for managing disputes, which, while everyone hopes they won’t be necessary, is a useful feature to have in place from the start of a relationship.
In addition to laying out the scope of the work, an effective audit engagement letter should include the terms and conditions of the service agreement, including liability limitations, confidentiality commitments and dispute resolution provisions. It should also include the name of the person in the company who will be responsible for signing the document. what is an engagement letter in auditing