What Is an Engagement Letter in Auditing

An engagement letter in auditing is a document signed by the client and an accounting firm to establish the scope of professional services to be rendered. This is a very important tool to ensure that all parties involved are clear about the expectations and responsibilities for each service. It prevents misunderstanding between the two and can help avoid disputes or even legal action in cases where there is a dispute about what is expected.

It provides written confirmation of the auditor’s acceptance of the appointment, the objectives of the engagement and the extent of responsibilities, along with a description of documents to be reviewed or audited. It also includes the form of reports to be provided to the client. It is typically addressed to the individual who retains or approves the engagement – usually the board, its chairperson, the Chief Executive Officer or another senior member of management.

A good engagement letter should include a mediation or arbitration clause in the event that a dispute does arise, helping to reduce time and cost in resolving such disputes. It should also state the professional services to be rendered, including an evaluation of internal controls, an audit report and an opinion letter at the end of the audit process.

An engagement letter is needed for every new client and should be reissued periodically as the scope of the engagement changes. This practice is recommended by the AICPA Liability Insurance Plan Committee and many malpractice insurance companies offer reduced premiums to firms that use these tools to limit their exposure. what is an engagement letter in auditing