Obtaining an engagement letter is not required under generally accepted auditing standards, but it makes good business sense. It helps to clearly define responsibilities between practioners and their clients, thus eliminating misunderstandings that could lead to liability claims and reducing the vulnerability of practitioners to legal risks.
An engagement letter can also help to minimize staff misunderstandings and reduce the amount of time spent on resolving them.
An Audit Engagement Letter is a legal document that defines the responsibilities of both parties involved in an audit. This ensures that the work performed is in accordance with the applicable professional standards, and minimizes misunderstandings between the client and accountant. It also helps to protect the firm against scope creep. A recent survey by Ignition found that accounting and bookkeeping firms lose an average of $103,778 each year in unrecoverable out of scope work. This loss can be reduced by creating a project management plan and drafting a clear scope statement that is attached to the audit engagement letter.
The audit engagement letter should include a description of the scope of services, including the financial statements and periods to be examined, as well as a list of procedures that will be used. It should also contain the auditor’s responsibilities, such as conducting the audit in accordance with professional standards and obtaining sufficient appropriate evidence. In addition, the audit engagement letter should specify the responsibilities of the client, such as providing access to records and personnel and maintaining an effective system of internal control.
A written contract is not required by generally accepted auditing standards, but it does make sense to obtain an engagement letter before commencing an audit. This will help to reduce misunderstandings between the client and the auditor, and will reduce the exposure of the firm to potential legal risks.
Scope of Work
One of the most common areas of liability claims against CPAs is going beyond the scope of an engagement, and a well-written scope management plan is the best way to define and limit project boundaries. A clear scope of work identifies the services to be rendered, which helps guard against unreasonable client expectations.
Describe the services to be provided, including any tax forms to be prepared and the expected delivery dates of the deliverables. This information can help reduce potential misunderstandings between the practitioner and the client, and will also provide a useful reference to guide fieldwork. It’s often helpful to include a sample report format in the scope section, to show clients what the final report will look like.
Address the letter to a specific client point of contact. This can help to prevent a miscommunication between the client and the firm, and may be particularly useful in reducing confusion when multiple owners are involved. In addition, identifying a single client contact can make it easier to communicate the scope of the engagement to staff assigned to the project.
Some malpractice insurance carriers offer reduced premiums to firms that use engagement letters, as they serve as an effective tool to mitigate risk and reduce liability claims against the practice. As such, it’s important to update engagement letters on a regular basis to ensure they reflect the current status of the relationship with the client.
An audit engagement is an arrangement for an auditor to perform an examination of a client’s accounting records and financial statements. The terms of an engagement are spelled out in the engagement letter that the auditor prepares and sends to the client. It’s important to have such a letter in place because it defines the auditor’s responsibilities and eliminates any possible misunderstandings between the two parties. It also makes it easier to document services rendered and to present fees for those services.
The engagement letter specifies the scope of work and the agreed-upon price for the services to be performed by the auditor. It may also include provisions for additional services that the client requests or that the auditor believes are necessary. These can include a review of internal control procedures, a test of transactions and an analysis of the effectiveness of financial disclosures. The engagement letter should also specify the basis for calculating the audit fees and billing arrangements, such as payment terms and the invoicing schedule.
An engagement letter should clearly identify the client and include a contact person. It should also state the extent to which the auditor is relying on information provided by the client, including a description of any limitations in the scope of the engagement. The letter should also disclose whether the audit services are being performed by a full-time permanent employee or by professionals of an affiliated accounting firm.
It is important for an auditor to have a written engagement letter with an audit client in order to solidify audit arrangements and establish a clear understanding of duties and obligations on both sides. It can also help in avoiding future misunderstandings.
The engagement letter should include identification of the entity being audited, the fiscal year end of the financial statements and whether the financial statements are to be audited, reviewed or compiled. It should also state the nature of the services to be provided and any limitations or restrictions placed on the engagement.
Any other non-audit related services that the firm provides should be described in an addendum to the engagement letter. An addendum should also detail the basis for fees and billing arrangements. In addition, any confidentiality and data protection requirements should be addressed.
Generally, an engagement letter should identify the persons retaining the firm and the individual in management who approves the engagement; this is typically the Board, its chairperson or the Chief Executive Officer. The letter should also specify if the engagement is for one year or a continuing service engagement and should contain a termination provision.
An audit engagement letter should also clarify that an audit is not designed to detect all instances of fraud and error and that an audit cannot provide absolute assurance regarding the accuracy of a company’s financial statements. It should also explain that if the auditor discovers that the client has engaged in fraudulent transactions, the auditor will notify the client without delay.