An audit engagement letter is a document that sets clear expectations from both sides before beginning an audit. It should include a summary of the audit scope and responsibilities, reporting requirements, fee structure, and confidentiality provisions. It should also identify the audit team and provide a timeline for performing audit fieldwork.
This document should be sent to new clients after verbal confirmation that you’ve been appointed as their auditor and ideally before the start of any audit work. It should also be sent to existing audit clients if no such letter has previously been sent.
In addition to clarifying the scope of an audit, an engagement letter should also explain the management’s statutory and professional duties and responsibilities, including the management’s responsibility for maintaining proper accounting preparation of financial statements, institution of internal controls, selection and application of accounting policies, and safeguarding assets. It should also point out that an audit’s purpose is to assess the risk of material misstatement in the financial statements, not to discover fraud and defalcations.
The audit engagement letter should include a mediation or binding negotiation clause to help resolve any disputes that may arise. This can be a significant benefit for both parties since it reduces the risk of legal dispute and the cost and time involved in litigation. It should also request a signature from an authorized representative of the client to confirm that the letter has been read and understood. This should be recorded as evidence in the audit engagement file. audit engagement letter sample