4.1.3 Engagement letter, procedure of sending letter, purposes and contents of the letter-ISA 210

ISA 210, “Agreeing on the Terms of Audit Engagements,” provides guidance on the engagement letter, including its procedure, purposes, and contents. Here’s an overview:

Procedure of Sending the Engagement Letter:

1. Forming an Understanding: The auditor and the client should reach a mutual understanding of the terms of the audit engagement. This involves discussing and agreeing upon the objectives, scope, and limitations of the audit.
2. Documenting the Understanding: The auditor prepares an engagement letter to document the agreed-upon terms of the audit engagement.
3. Sending the Engagement Letter: The auditor sends the engagement letter to the client, requesting the client’s acknowledgment of the agreed-upon terms. It is preferable to send the engagement letter before the commencement of the audit work. If this is not possible, it should be sent as soon as practical after the commencement of the engagement.

Purposes of the Engagement Letter:

1. Mutual Understanding: The engagement letter aims to establish a mutual understanding between the auditor and the client regarding the objectives, scope, and limitations of the audit engagement. It ensures that both parties are clear about their roles, responsibilities, and expectations.
2. Confirmation of Terms: The engagement letter serves as written confirmation of the agreed-upon terms, reducing the risk of misunderstandings or disputes in the future.
3. Legal and Ethical Requirements: The engagement letter fulfills legal and regulatory requirements that may mandate the existence of a written agreement for audit engagements. It also demonstrates compliance with professional ethics and standards.

Contents of the Engagement Letter: ISA 210 does not prescribe specific wording for the engagement letter, but it suggests the following key elements to include:

1. Objective and Scope of the Audit: Specify the purpose of the audit, the responsibilities of the auditor and management, and the specific areas or financial statements to be audited.
2. Audit Criteria: Identify the financial reporting framework to be used as the basis for the audit, such as generally accepted accounting principles.
3. Responsibilities of the Auditor: Describe the auditor’s responsibilities, including the exercise of professional judgment, obtaining reasonable assurance, and the conduct of the audit in accordance with applicable auditing standards.
4. Responsibilities of Management: Outline management’s responsibilities, such as providing access to records and information, ensuring the accuracy and completeness of financial statements, and disclosing all relevant information.
5. Limitations of the Audit: Communicate any limitations or exclusions in the audit scope, such as the use of estimates, inherent limitations of internal control, or any agreed-upon procedures engagements.
6. Communication: Address the expected form and timing of communication between the auditor and management, including the reporting of audit findings and any significant matters arising during the engagement.
7. Fees and Billing Arrangements: Specify the audit fees and payment terms, including any provisions for additional fees in case of unforeseen circumstances or changes in scope.
8. Other Agreed-upon Terms: Include any other agreed-upon terms specific to the engagement, such as confidentiality agreements, engagement team composition, or any additional services to be provided.