We have established that the directors and auditors of a limited company have very precise legal duties, we are also aware that modern accountancy firms thrive on their ability to provide a wide range of professional services in addition to audit. It is the purpose of an engagement letter to define clearly the extent of the auditor‘s responsibilities and so minimise the possibility of any misunderstanding between the client and the auditor.
Further, the engagement letter provides written confirmation of the auditor‘s acceptance of the appointment, the scope of the audit, the form of his report and scope of any non-audit services. If an engagement letter is not sent to clients – both new and existing – there is scope for argument about the precise extent of the respective obligations of the client and its directors and the auditor.
The contents of an engagement letter should be discussed and agreed with management before it is sent and preferably prior to the audit appointment). The engagement letter is a well established audit technique and ISA 210 Terms of Audit Engagements provides guidance in this area.
The use of engagement letters
There is a contractual relationship between an auditor and his client. The auditor should therefore ensure that at the time he agreed to perform certain work for the client, the scope of his responsibilities is made clear preferably in writing, in that the terms of his contract with his client are properly defined. Where possible a letter of engagement should be prepared setting out in detail the actual services to be performed, and the terms of engagement should be accepted by the client so as to minimise the risk of disputes regarding the duties assumed