Engagement Letter In Auditing (CPA)

 

The Engagement Letter
 
            The engagement letter documents and confirms the auditor's acceptance of the appointment, the objective and scope of the audit, the extent of the auditor's responsibilities to the client and the form of any reports.
 
Contents of the Engagement Letter
 
            The form and content of the audit engagement letter may vary for each client, but they should generally include reference to:
 
■ the objective of the audit of financial information;
 
■ management’s responsibility for the financial information as described in ISA 200;
 
■ the applicable financial reporting framework;
 
■ the scope of the audit, including reference to applicable legislation such as related to fraud (ISA 240) or money laundering, regulations or pronouncements of professional bodies to which the auditor adheres;
 
■ the form of any reports or other communication of results of the engagement, including with those charged with governance .
 
■ the fact that because of the test nature and other inherent limitations of an audit, together with the inherent limitations of any system of internal control, there is an unavoidable risk that even some material misstatement may remain undiscovered; unrestricted access to whatever records, documentation and other information requested in connection with the audit.
 
 
 
The auditor may also wish to include in the letter:
 
■ arrangements regarding the planning of the audit;
 
■ an applicable code of ethics;
 
■ an expectation of receiving from management written confirmation concerning representations made in connection with the audit (ISA 580);
 
■ a request for the client to confirm the terms of the engagement by acknowledging receipt of the engagement letter;
 
■ a description of any other letters or reports the auditor expects to issue to the client;
 
■ the basis on which fees are computed and any billing arrangements.
 
When relevant, the following points could also be made:
 
■ arrangements concerning the involvement of other auditors and experts in some
 
aspects of the audit;
 
■ arrangements concerning the involvement of internal auditors and other client staff;
 
■ arrangements to be made with the predecessor auditor, if any, in the case of an initial
 
audit;
 
■ any restriction of the auditor’s liability;
 
■ a reference to any further agreements between the auditor and the client. On recurring audits, the auditor may decide not to send a new engagement letter each year. However, he should consider sending a letter in any of the following circumstances:
 
■ where there is an indication that the client misunderstands the objective and scope of the audit;
 
■ where the terms of the engagement are revised;
 
■ where there has been a recent change in management;
 
■ where the size or nature of the business has changed;
 
■ where there are legal requirements that an engagement letter be written.
 
 
 
            If the auditor reviews both the parent and a subsidiary, branch or division of the
 
company, he may consider sending a separate engagement letter to that component
 
business. The factors that the auditor should consider are who appoints the auditor of the
 
component, legal requirements, degree of ownership by parent and the extent of any
 
work performed by the auditors.
 
 
 
Sample Audit Engagement Letter
 
To the Board of Directors or the appropriate representative of senior management:
 
You have requested that we audit the financial statements of ..., which comprise the balance sheet as at ..., and the
 
related income statement, statement of changes in equity and cash flow statements for the year then ending, and
 
the related notes. We are pleased to confirm our acceptance and our understanding of this engagement by means of
 
this letter. Our audit will be conducted with the objective of our expressing an opinion on the financial statements.
 
We will conduct our audit in accordance with International Standards on Auditing. Those Standards require that we
 
plan and perform the audit to obtain reasonable, but not absolute, assurance about whether the financial statements
 
are free from material misstatements, whether due to fraud or error. An audit involves performing procedures to
 
obtain audit evidence about the amounts and disclosures in the financial statements. The audit procedures selected
 
depend on the auditor’s assessment of the risks of material misstatement of the financial statements. An audit also
 
includes evaluating the appropriateness of accounting policies used and the reasonableness of significant estimates
 
made by management, as well as evaluating the overall financial statement presentation and disclosures.
 
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 misstatements may
 
remain undiscovered.
 
In making our risk assessments, we consider internal control relevant to the entity’s preparation of the financial
 
statements as a basis for designing audit procedures that are appropriate in the circumstances, but not for the
 
purpose of expressing an opinion on the effectiveness of the entity’s internal control. However, we expect to provide
 
you with a separate letter concerning any material weaknesses in the design or implementation of internal control
 
over financial reporting that come to our attention during the audit of the financial statements.*
 
We remind you that the responsibility for the preparation of financial statements that present fairly the financial
 
position, financial performance and cash flows of the company in accordance with International Financial Reporting
 
Standards is that of the management of the company. Our auditors’ report will explain that management’s
 
responsibility for the preparation of the financial statements also includes:
 
■ maintaining internal control relevant to the preparation of financial statements that are free from misstatement,
 
whether due to fraud or error;
 
■ selecting and applying appropriate accounting policies that are consistent with International Financial Reporting
 
Standards; and
 
■ making accounting estimates that are appropriate in the circumstances.
 
As part of our audit process, we will request from management written confirmation concerning representations made
 
to us in connection with the audit.
 
We look forward to full co-operation from your staff and we trust that they will make available to us whatever records,
 
documentation and other information are requested in connection with our audit.
 
[Insert additional information here regarding fee arrangements and billings, as appropriate.]
 
Please sign and return the attached copy of this letter to indicate that it is in accordance with your understanding of
 
the arrangements for our audit of the financial statements.
 
HDSW, Auditors
 
Acknowledged on behalf of Werwater Company by
 
(signed)
 
Name and Title
 
Date