What is the purpose of an "Audit Engagement Letter"? What are it's main contents ?

An engagement letter is in many respects a written contract between the CPA and the client, stating both parties’ understanding of the professional relationship. The letter allocates, in limiting language, the responsibilities of the engagement for the CPA and the client, and it’s an excellent communication link, providing both parties with a focus and an opportunity to identify additional services needed.

Unless the letter states what the engagement entails, the CPA and the client might be entertaining completely different points of view. The CPA’s concept of the engagement might be to write up the client’s books and prepare federal and state income tax returns. The client’s concept of the engagement might be to prepare income tax returns and advise about compliance for property tax returns, business licenses, sales tax, fidelity bonds, workers’ compensation insurance coverage and other insurance needs.

Courts and clients often do not understand the role of accountants. While an engagement letter will not make the CPA immune to lawsuits, the letter can be the “first line of defense” if a client makes a claim against the CPA.

The engagement letter should cover:

• the purpose of the engagement;
• specifically what the CPA “will and won’t do” (the scope);
• client instructions and responsibilities;
• reliance on facts the client gives the CPA;
• known adverse or negative conditions or circumstances;
• billing rates and estimates;
• request for the client’s signature; and
• instructions to return the signed engagement letter.

In addition, engagement letters can include:

• warnings about inadequate internal control;
• limitations on distribution of financial statements (what the client intends to do with them);
• arbitration clause; and
• record retention policy.

When a company has to go through the audit process, an auditor may use the term "audit engagement." This can mean different things, so it is important that the auditor clarify what he means when he uses the term. Regardless of which definition the auditor follows, however, the auditor always follows specific procedures and guidelines for handling the engagement.

An audit engagement very loosely refers to an audit that an auditor performs. More specifically, it refers only to the initial stage of an audit during which the auditor notifies the client he has accepted the audit work and clarifies his understanding of the audit's purpose and scope. Even more specifically, the term audit engagement can refer to the written letter by which the auditor formally notifies the client he will engage in audit services.

Full Engagements

When referring to the audit as a whole, audit engagements encompass several distinct steps, which are organized into planning, testing of controls, substantiation or fieldwork and exit or finalization. The first is sending a letter to the client alerting him of the audit. After this initial contact, the client and auditor meet to pinpoint further how, when and why the audit will happen, as well as the resources the auditor will have at his disposal. The auditor then conducts primary surveys to understand the company and the controls in place. The next step is testing the controls and gathering as much information as possible. Based on the results, the auditor constructs a draft of the formal audit report, which he shares with the client. As the audit work draws to a finish, the auditor and client schedule an exit meeting. The client responds to the findings in the report and the recommendations the auditor has made. The auditor issues a final report and may ask the client to complete a survey about the auditor's performance and the audit results. Auditors complete the audit by following up with the client, normally within six months.

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