Auditing Letter of engagement Mwamba Ally Jingu: FCPA; PhD

ENGAGEMENT LETTERS

International Standard on Auditing (ISA) 210 Agreeing the Terms of Audit Engagements

Once the auditor is appointed, the auditor and the client should agree on the terms of the
engagement. The agreed terms would need to be recorded in an audit engagement letter or other
suitable form of contract. It is in the interest of both client and auditor that the auditor sends an
engagement letter, preferably before the commencement of the engagement, to help in avoiding
misunderstandings with respect to the engagement.

The audit engagement letter is usually written by the engagement auditor to the prospective
client.The purpose of an audit engagement letter is to minimize any possible misunderstanding
concerning the scope and terms of the audit engagement. It specifies the responsibilities of both
parties and states such matters as fee arrangements and deadlines for completion. Clear
understanding of the terms of engagement should exist between the client and the audit firm
before the auditor commences business.

The agreed terms would need to be recorded in an audit engagement letter.The auditor should
document the mutual understanding with their client in an engagement letter before the audit
starts.Without an engagement letter, the terms of the engagement are easily disputed. The
auditor and the client should agree on the terms of the engagement. The letter is a written
contract between the auditor and the client

Principal Contents
The form and content of audit engagement letters may vary for each client, but they would
generally include reference to:
• Specifying the objective of the audit of financial statements.
• Specifyingmanagement’s responsibility for the financial statements.
• Specifyingthe scope of the audit, including reference to applicable legislation, regulations, or
pronouncements of professional bodies to which the auditor adheres.
•Specifying the form of any reports or other communication of results of the engagement.
• Specifyingthe fact that because of the test nature and other inherent limitations of an audit,
together with the inherent limitations of any accounting and internal control system, there is an
unavoidable risk that even some material misstatement may remain undiscovered.
• Specifyingunrestricted access to whatever records, documentation and other information
requestedin connection with the audit.
Auditing Letter of engagement Mwamba Ally Jingu: FCPA; PhD

The auditor may also wish to include in the letter:

• Arrangements regarding the planning of the audit.

• Expectation of receiving from management written confirmation concerning representations
made in connection with the audit.
• Request for the client to confirm the terms of the engagement by acknowledging receipt of
the engagement letter.
• Description of any other letters or reports the auditor expects to issue to the client.
• Basis on which fees are computed and any billing arrangements

One of the objectives of an engagement letter is to make clear that it is the responsibility of:
(a) the auditor to:
- Plan and perform the audit in accordance with the applicable auditing standards
- to obtain reasonable assurance (not absolute assurance) about whether the financial
statements are free from material misstatements
- To express an opinion on whether the financial statements are free from material
misstatements
- An audit opinion is not a guarantee of the accuracy of the financial statements and is
subject to the inherent risk that errors and fraud, if they exist might not be detected

(b) The management (and/or the board of directors) to:

-To prepare the financial statements in accordance with the legislation, regulations,
accounting and financial reporting standards/that show a true and fair view
-Prevent and detect errors fraud and other irregularities
A well-written engagement letter can be useful evidence in the case of a lawsuit, given that the
letter spells out the terms of the engagement agreed to by both parties.