An audit engagement letter is a written document sent to the client by the auditor before the beginning of an audit that sets out the terms of the audit and explains the services that will be rendered. It clearly outlines the scope of the audit, fees and time frame. It also cites any additional services that lie outside of the current agreement and how they are calculated.
This will help to prevent “scope creep” and ensure that all necessary work is completed during the audit. On the client’s end, it provides reassurance that they understand what is being performed and helps to prevent surprises at the time of results release or invoice delivery. It also allows the client to ask questions about anything that they do not understand.
The audit engagement letter also explains the statutory and professional duties of both the auditor and management. It points out that it is the responsibility of management to maintain proper accounting preparation of financial statements, institute internal control, select and apply accounting policies, safeguard assets, and to notify the auditor of irregularities that have a material effect on the financial statement.
An audit engagement letter should be sent to new clients soon after their appointment as an auditor and in any event before the commencement of their first audit. It should also be sent to existing clients whose circumstances require it or when there has been a change in the nature, size and scope of an assignment. A separate letter should be sent to each subsidiary of a parent company where there are joint auditors.