Audit engagement letter is a document that outlines expectations from both parties prior to beginning the work. The document helps avoid misunderstandings by setting forth the scope of your service, what your client is responsible for, how long the audit will take, and details about your fee. It’s also a great tool to use to limit “scope creep” from happening during the audit process.
While many people are familiar with contracts, the nuances of contractual requirements related to an audit engagement are not always well understood. In this article, we will discuss the circumstances under which an engagement letter is issued, how the audit engagement letter is prepared, and required and recommended audit engagement terms to include in your audit engagement letters.
For the client, audit engagement letters provide reassurance that your services will be limited to specific areas of focus. This helps prevent the auditor from straying from their original scope and, for example, going from compliance to inventory management. It can also help with budgeting by clearly identifying the cost structure for your services. If additional services outside the current agreement are required later, they should be added to this letter with an associated cost estimate.
The engagement letter should clearly state your billing rates for professional staff and partners, including the total estimated fees for the engagement. It should disclaim any obligation to detect fraud or violations of law and should contain language establishing your independence. Finally, it should be signed by both your firm and management and included in the auditor’s working paper file.