An engagement letter is a document that defines the legal relationship between your firm and its clients. For an audit or review engagement, it usually specifies the scope of work and compensation for your services.
An auditor should send an engagement letter to new clients, preferably prior to the first audit appointment. If a client has subsidiary companies, the auditor should also request the board of directors of each subsidiary to sign an engagement letter.
An Audit Engagement Letter is an agreement between a client and a CPA firm that sets out the terms of the relationship. It defines the scope of the audit, establishes the auditor’s responsibilities and the terms under which the firm will provide services. It also details the responsibilities of the client and includes commercial matters, such as fees and payment terms.
In general, the audit engagement process is designed to be independent and objective, with the auditor assessing the risk of material misstatement in the company’s financial statements and designing appropriate audit procedures to assess this risk. The final product is the audit report, which reflects the auditor’s opinion on the financial statements and related disclosures.
The engagement letter should define the scope of the audit, including the financial statements and periods to be examined, as well as the auditing standards that apply. It should also state the responsibilities of the auditor, including conducting the audit in accordance with auditing standards, obtaining sufficient appropriate evidence and maintaining professional skepticism and independence.
The audit engagement letter should also identify the responsibilities of the client, including providing access to records and personnel, preparing the financial statements in accordance with the applicable financial reporting framework and maintaining an effective system of internal control. It should also address the requirements of the client to maintain confidentiality and comply with data protection regulations.
The scope of an audit engagement is an important aspect of the agreement between an auditor and a client. It defines the boundaries of the service and limits the potential for professional liability claims. In addition, it provides a legal basis for the contractual relationship between the parties.
An effective scope of work begins with a risk assessment. The assessment identifies the significant risks associated with the client’s financial reporting framework and evaluates the likelihood of those risks impacting the integrity of the company’s financial statements. The assessment also takes into account the scope of previous audits, management’s response to those risks, and other relevant factors.
During fieldwork, the auditor gathers evidence and performs substantive procedures to ensure that the financial statements are free from material misstatement. The auditor should also communicate with the client and keep them informed of any observations during the course of the review.
At the end of the audit, the auditor prepares a report that contains their findings and an opinion on the financial statements. The report must be delivered to the client within a reasonable time after completion of the audit.
The letter should also cite any services that lie outside of the current agreement but could in theory be added, and the cost for these additional services. This helps to avoid any misunderstandings, confusion, or disputes that may arise in the future.
An engagement letter helps to solidify audit arrangements between the auditor and client. It also helps to reduce the risk of disputes or claims that may arise from the work performed. It can clarify what the client is expected to do, and it can describe the services the accountant will perform. An engagement letter can contain other terms and conditions, including fee provisions.
A CPA firm should address the engagement letter to a specific point of contact at the client entity, such as the chief executive officer if the client is a corporation or a business owner if the client is a sole proprietorship or partnership. Identifying a single client point of contact has been beneficial in instances where conflicting information is provided to the CPA, or when a request is made that falls outside the scope of the audit engagement.
If the client has multiple tax returns, a separate engagement letter should be sent to each taxpayer, or to each individual taxpayer where ownership of a business entity or trust is involved. The audit engagement letter should include a description of the tax returns and the services to be provided. Typically, an audit engagement letter contains indemnification, exculpation and damage limitation language, which is similar to the provisions of lawyers’ engagement letters. However, such disclosures should be carefully considered to ensure that they are in compliance with state and AICPA ethical rules.
An audit engagement letter establishes a contract between the practitioner and client that defines the services to be performed and any fees associated with those services. Although not a requirement of generally accepted auditing standards, obtaining an engagement letter is important because it clearly defines the responsibilities of both parties and reduces the vulnerability of practioners to legal liability for negligence.
An engagement letter should include provisions for the fee, whether stated as a range, in hourly rates or as a standard per diem charge, and a retainer provision. The letter should also include a description of the scope of the audit, the auditor’s responsibilities and the client’s responsibilities. It should also contain a statement that the audit is an independent opinion and does not provide assurance on the financial statements of the issuer.
The engagement letter should state that any additional services requested by the client, including management advisory services, special matters and personal financial statement reviews, are subject to the approval of the Audit/Finance Committee. Any such engagement letter should include a description of the additional services and a fee schedule showing the proposed fees for those services.
The engagement letter should also disclose the percentage of hours spent by professionals other than the principal auditor’s full-time permanent employees on the audit. The disclosure should be presented in narrative or tabular form.