This is a letter sent by the auditor to the client before the commencement of an audit by the client. It should be accepted by the client in writing, it is written to create a contract or legal relationship between the auditor and client and it forms the basis of agreement risk on the nature of audit risk to be performed. The letter serves as an agreement to accept appointment of the auditor.
Purpose of an engagement letter
1. Define the extent of the auditor‘s responsibility concerning the audit.
2. Minimize misunderstanding between the auditor and client on duties to be performed.
3. Confirm in writing any verbal agreements entered into between the auditor and client.
4. Minimize the auditor‘s liability to 3rd parties especially where the auditor must define the scope of work.
5. Inform the clients on other non-audit services to be provided.
6. Indicates a formal acceptance of the engagement by the auditor.
7. Educate the client on various issues e.g. duty to maintain proper procurement records.
8. Duty to provide information and explanation necessary for the audit work.
9. Duty to prevent the occurrence of errors and frauds.