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Engagement Letter
An engagement letter outlines the scope of work and payment to be provided by a client for a third (3rd) party consultant.
An engagement letter is used commonly with professional services such as accountants (CPAs), attorneys, and real estate agents to properly identify the relationship with the client often required under State law.
In addition, the letter is legally binding and requires payment by the client upon completion of the services.
Objectives of an Audit Engagement Letter
An audit engagement letter defines clearly the extent of the auditor’s responsibilities and minimizes any misunderstanding between the client and the auditor.
It also provides written confirmation stating the acceptance of the auditor’s appointment, the scope of an audit along with the form of his report.
With the help of the audit engagement letter, the client becomes aware of the statutory responsibilities of the directors.
This in no way is diminished by the appointment of an auditor.
The management also informs that the audit tests will be based on the results of an evaluation of internal control.
The client also becomes informed about the other professional services that the auditor can give.
The client is informed that the discovery of fraud is not the main aim of the audit with the help of an engagement letter.
It is with the help of an audit engagement letter, the scope of special or additional work is also determined.
The basis of the computation of frees is also brought to the client.
How Does an Audit Engagement Letter Work?
An audit engagement letter serves the same purpose as a contract between two parties.
Its format is generally less formal compared to a contract outline and it avoids any legal technical language.
This engagement letter intends to briefly but accurately explain the services that are to be delivered along, with the deadline or deadlines, the compensation, and terms and conditions.
It is a legal document and binding in a business deal.
This letter also serves to limit the scope of the company’s services.
For instance, the letter may describe the specific purpose or area of expertise in which their service can be used when an individual or business secures the services of an attorney.
How to Write an Audit Engagement Letter?
Step 1: Identify the Scope
The first step includes identifying the scope of services that have to be provided.
The engagement letter should lay down the professional services that will be provided to document your understanding regarding the services.
The audit engagement letter should list out the related outputs for the audit, including an evaluation of the internal controls.
It must also include the preparation of the audit report and opinion letter after the engagement.
Step 2: Establish the Timeline
The second step includes establishing the timeline for performing audit fieldwork.
The engagement letter outline must identify the time frame in which it will be finished since conducting some audit procedures may need the staff’s cooperation and the availability of corporate records.
The timeline must be particularly referenced in the engagement letter to avoid any misunderstandings about audit-related deadlines.
Step 3: Set Up Professional Fee Structure
The third step includes establishing the professional fee structure.
The audit engagement letter should include billing rates for professional staff and other partners to help avoid disputes regarding professional fees.
These billing rates must be included with an estimate of the total fees and costs, as well as specific provisions for travel and other reimbursements.
It should also be made clear that no fees are contingent upon the outcome of the audit as that would affect the auditor’s independence.
Step 4: Reject Any Obligations and Include Clauses
Your audit engagement letter should state that the audit is limited to professional standards and other purposes.
It also mentions that it is not a comprehensive investigation regarding potentially illegal activities like fraud detection.
The simple letter must also include a mediation or binding negotiation clause that will help in resolving any disputes.
In case a legal dispute does arise from the engagement, a mediation clause can help in resolving the matter.
This can be done by preventing formal litigation, thus reducing the time and expense of both the client and the auditor.
Step 5: Signature
Lastly, you must obtain the client’s signature or board member’s approval, The auditor must take care to obtain a signed copy of the sample letter from an authorized client or client’s representative to document the receipt and understanding of the engagement letter by the client.
Advantages of an Audit Engagement Letter
Setting certain expectations is important and especially in cases of clients.
The client gets the reassurance of knowing when a service will be done along with its costs with this engagement letter layout.
The letter also helps in making it clear that if other costs are involved that are not covered in the agreement like the required software they must be purchased separately by the client.
The basic letter also helps in citing services that lie outside the current agreement but may be added in the future as required along with an estimate of the costs of these additions.
It may include a clause related to the mediation or binding negotiation for the relationship.
This clause generally guides managing any kind of disputes that may arise between the parties.
| Author | – |
| Language | English |
| No. of Pages | 2 |
| PDF Size | 1 MB |
| Category | Form |
| Source/Credits | eforms.com |
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