The definition of an engagement letter in auditing is a formal document that establishes the relationship between a professional firm and its client(s) with respect to the work being undertaken. It typically addresses the scope of the engagement and the terms of compensation for the firm.
An effective engagement letter increases clarity during the audit process. This can be helpful in avoiding disputes and litigation in the future. It also helps to reduce the amount of back-and-forth emails that can be required between clients and auditors. This article will discuss the circumstances under which an engagement letter is issued, how it should be prepared, and required and recommended audit engagement terms to include in an audit engagement letter.
Generally, the letter is addressed to the person who is retaining or approving the engagement, such as the Board’s chairperson or the Chief Executive Officer. It should identify the entity, its fiscal year end, and the financial statements that are being audited, reviewed, or compiled. It should also describe the scope of the engagement (e.g., whether it is an integrated audit of internal control over financial reporting and an audit of the financial statements or a separate audit of the financial statements).
Lastly, the letter should state the professional fee structure. It should clearly provide billing rates for all firm personnel assigned to the engagement, estimated fees and costs, and a provision for progress billing. It should also disclaim any responsibility for fraud detection. what is an engagement letter in auditing