It is in the interest of both the client and the auditor that the auditor sends an engagement letter preferably before commencement of the engagement.
Importance of Audit Engagement Letter
The letter of engagement has the following purposes: –
• Helps avoid misunderstanding in respect to the engagement. Without written understanding, there may be an implied contract created by either auditor’s conduct or a provision in the articles of association which may not be in auditor’s liking.
• Documents the auditor’s acceptance of the appointment as well as the objective and the extent of the auditor’s responsibility to the client.
• Confirms in writing any verbal arrangements between the client and the auditor.
• Provides the auditor with a medium through which he can clarify the
client’s and his respective responsibilities.
• The letter informs the client of other services that the auditor’s firm
can provide e.g. taxation or consultancy.
• Minimizes auditor’s liability to third parties.
Principal Contents of an Engagement Letter
The contents of a letter of engagement for audit services are listed in ISA 210 Agreeing the Terms of Audit Engagements. They should include the following:
– The objective of the procurement audit.
– Management’s responsibility regarding the procurement audit.
– The scope of the audit including references to applicable legislation or pronouncements of professional bodies to which the auditor complies.
– The fact that because of the test nature of auditing and other inherent limitations of an audit together with inherent limitations of internal control system, there is an unavoidable risk that some material misstatements may remain undiscovered.
– The expectation of unrestricted access to whatever records and documentations.
Other matters included in engagement letter are:
– Expectation of receiving from management written confirmation concerning representations made by the auditor in connection with the audit.
– The basis on which audit fees are computed or any other billing arrangement.
– A request to the client to confirm the terms of the engagement by acknowledging receipt of the engagement letter.