An engagement letter is a written agreement between an auditor and his client that outlines the professional services to be provided and details how long the audit will take. It is a critical tool in auditing and can protect both parties by clearly defining expectations. This article covers how to prepare an engagement letter for auditing and the benefits that it provides.
The purpose of an engagement letter is to limit an auditor’s responsibilities and the scope of his work by clearly outlining what will be performed during the audit, what he can do, and when he can complete the work. This helps reduce the risk of legal liability to third parties that might arise as a result of the audit. It also allows the accountant or auditor to establish a time frame for his completion of the audit and can eliminate staff misunderstandings by providing those assigned to the work with the specifics of what will be performed.
The engagement letter should also include a description of the basis for fees. This should include the billing rates of those in the firm who will perform the work and the estimated time to complete the audit along with any travel and direct costs that will be incurred. It should also disclaim any obligation to detect fraud. The letter should also contain the auditor’s statutory and professional duties and reporting responsibilities. An engagement letter should be sent to each audit client. However, an auditor may choose to send an engagement letter only on a recurring basis. what is an engagement letter in auditing