Definition
Engagement Letter (Letter of Engagement)
An engagement letter, also known as a letter of engagement, is a document used by auditors to define clearly the scope of the auditors’ responsibilities in an engagement. It provides written confirmation of the auditors’ acceptance of the appointment, the scope of the audit, the form of the report, and details of any non-audit services to be provided. Typically, the contents of the letter are discussed with the management of the business to be audited before sending it.
Examples
Example 1: Audit Engagement for a Small Business
An auditing firm is appointed by a small business to perform its annual financial audit. The auditing firm sends an engagement letter to the business owner outlining the scope of the audit, the timeframe for completion, the form of the audit report, and additional tax advisory services offered.
Example 2: Engagement Letter for Non-Profit Organization
A non-profit organization engages an auditor to perform a compliance audit on its financial statements. The engagement letter sent to the organization details the auditors’ responsibilities, the resources required from the organization, and any additional review services that might be necessary to ensure compliance with regulatory standards.
Frequently Asked Questions (FAQs)
What is included in an engagement letter?
Typically, an engagement letter will include:
- The objectives and scope of the audit.
- The auditors’ responsibilities.
- The client’s responsibilities.
- The audit report’s form.
- Details on any other services, such as tax or advisory services.
- Terms and conditions, including fees and payment terms.
Why is an engagement letter important?
An engagement letter is important as it provides a clear understanding between the auditors and the client about what is expected during the audit. It minimizes misunderstandings and sets clear guidelines for both parties.
When should an engagement letter be issued?
An engagement letter should be issued at the start of an audit engagement, after discussions about the audit’s scope and details have taken place with the client’s management.
Can an engagement letter be modified?
Yes, an engagement letter can be modified if both the auditor and the client agree to the changes in writing. This often occurs when there are significant changes in the scope or nature of the audit services required.
Are engagement letters legally binding?
Yes, engagement letters are considered legally binding contracts that outline the responsibilities and expectations of both parties involved in the audit engagement.
Related Terms
- Audit Engagement: The arrangement in which an auditor is hired to conduct an audit of an organization’s financial statements.
- Scope of Audit: The extent and boundary of the audit work, including the period covered and areas to be audited.
- Non-Audit Services: Additional services offered by auditors that are not directly related to the audit function, such as tax advisory or consultancy services.
Online References
Suggested Books for Further Studies
- Auditing & Assurance Services: A Systematic Approach by William F. Messier Jr., Steven M. Glover, and Douglas F. Prawitt
- Principles of Auditing and Other Assurance Services by Ray Whittington and Kurt Pany
- Audit and Assurance Essentials: For Professional Accountancy Exams by Katharine Bagshaw
Accounting Basics: “Engagement Letter” Fundamentals Quiz
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