Audit engagement refer to the initial stage of an audit during which the auditor notifies the client he has accepted the audit work and clarifies his understanding of the audit’s purpose and scope. Even more specifically, the term audit engagement can refer to the written letter by which the auditor formally notifies the client he will engage in audit services.
The engagement letter will be sent before the audit. It specifies the nature of the contract between the audit firm and the client and minimizes the risk of any misunderstanding of the auditor’s role.
It should be reviewed every year to ensure that it is up to date but does not need to be reissued every year unless there are changes to the terms of the engagement. The auditor must issue a new engagement letter if the scope or context of the assignment changes after initial appointment.
ISA 210 requires the auditor to consider whether there is a need to remind the entity of the existing terms of the audit engagement for recurring audits and many firms choose to send a new letter every year, to emphasize its importance to clients.
The contents of the engagement letter
The form and content of audit engagement letters may vary for each client, but they would generally include reference to:
• The objective and scope of the audit;
• The responsibilities of the auditor;
• The responsibilities of management;
• The identification of an applicable financial reporting framework; and
• Reference to the expected form and content of any reports to be issued.
Types of Engagements
(a) Agreed-upon procedures: the auditor simply provides a report of the factual findings of the engagement agreed by the auditor, entity and any appropriate third parties, so no assurance is expressed. Users of the report must instead judge for themselves the auditor’s procedures and findings and draw their own conclusions.
(b) Compilation engagement: the practitioner is engaged to use his procurement audit expertise to collect, classify and summarise procurement information. Compilation engagements do not require the auditor to provide an opinion on the accuracy of the statements presented. While independence is paramount in audit and review engagements, accountants do not have to be independent of the business in question to perform a compilation engagement.
(d) Review engagement: While an audit is meant to give some assurance that the financial statements are free of material misstatements, a review engagement is only meant to ascertain whether or not the financial statements are believable or plausible. A review provides limited assurance that the financial statements conform to generally accepted accounting principles. This type of assurance is known as negative assurance. This means that the auditor is only providing assurance that nothing has come to their attention that would indicate the financial information is not presented in accordance with accounting standards.
(c) External audit engagement: the auditor provides a high, but not absolute, level of assurance that the information audited is free of material misstatement. This is expressed positively in the audit report as reasonable assurance.