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Appendix B
Engagement letters
The following letter is for use as a guide in conjunction with the considerations outlined in this
Manual and will need to be varied according to individual requirements and circumstances. A
list of further matters that may be considered for inclusion in such a letter is set out at the end
of this appendix.
Example letter
To the Board of Directors or the appropriate representative of senior management:
You have requested that we audit the balance sheet of .. as of .. , and
the related statements of income and cash flows for the year then ending. We are pleased to
confirm our acceptance and our understanding of this engagement by means of this letter.
Our audit will be made with the objective of our expressing an opinion on the financial
statements. We will conduct our audit in accordance with International Standards on Auditing
{or refer to relevant national standards or practices). Those Standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatements. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
Because of the test nature and other inherent limitations of an audit, together with the
inherent limitations of any accounting and internal control system, there is an unavoidable risk
that even some material misstatements may remain undiscovered.
In addition to our report on the financial statements, we expect to provide you with a separate
letter concerning any material weaknesses in accounting and internal control systems which
come to our notice.
We remind you that the responsibility for the preparation of financial statements including
adequate disclosure is that of the management of the company. This includes the
maintenance of adequate accounting records and internal controls, the selection and
application of accounting policies, and the safeguarding of the assets of the company. As part
of our audit process, we will request from management written confirmation concerning
representations made to us in connection with the audit.
We look forward to full cooperation with your staff and we trust that they will make available to
us whatever records, documentation and other information are requested in connection with
our audit. Our fees, which will be billed as work progresses, are based on the time required by
the individuals assigned to the engagement plus out-of-pocket expenses. Individual hourly
rates vary according to the degree of responsibility involved and the experience and skill
This letter will be effective for future years unless it is terminated, amended or superseded.

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April 2005

PKF International Limited is an association of legally independent member firms.

Please sign and return the attached copy of this letter to indicate that it is in accordance with
your understanding of the arrangements for our audit of the financial statements.
Yours faithfully
[Member firm]
Acknowledged on behalf of [Audit Client] by
Name, title
Further elements to consider for possible inclusion in an engagement letter
Not all engagements will require the inclusion of the clauses below, nor is this list meant to be
exhaustive. When drafting an engagement letter for a client, full consideration should be
given to the essential elements required to form a sound contractual relationship with that
client and to explain the respective responsibilities of both parties.

Mutual confidentiality of information undertakings by both parties to hold documents

in strict confidence unless otherwise required by law.

Timely provision of information by the client an undertaking that the client will
provide information on request to enable the fulfillment of the firms duties, and a
disclaimer of liability for problems arising from failure to provide accurate, timely

Rights of third parties a clause to limit the rights of third parties under the
engagement letter, if allowed by law.

Document ownership and retention policy a clause identifying that papers in the
firms possession are solely the firms property (except when they represent original
records of the client), and identification of the period for which such papers will be

Explanation of data protection procedures many countries have data protection

laws and the firm may explain their policies in this regard.

Conflicts of interest a clause indicating how the firm may deal with potential conflicts
of interest.

Settlement of fees a clause setting out the terms of business

Third party indemnity an indemnity from the client for costs arising should the firm
be required to infringe a third partys rights during the course of the engagement.

Quality of service an explanation of the complaints procedures and identity of

persons to be conducted if the client is dissatisfied with the service provided.

Governing law where a claim may potentially be brought in more that one
jurisdiction, a clause to identify the laws of which jurisdiction should be applied to
settle the claim or dispute.

Peer review a clause acknowledging that audit files will be made available to the

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PKF International Limited is an association of legally independent member firms.

jurisdictions professional accounting body or other quality control body.

Privacy legislation a clause concerning the application of legislation and, if

appropriate, agreement of client to indemnify in case of breach.

Limitation of liability a clause limiting liability by contract where permitted by law.

A description of the relationship between firms in PKF International

Presentation of audited financial report on the internet a clause stating that

responsibility for electronic presentation is that of the entitys governing body.

Termination a clause explaining how the engagement may be terminated by either


Communications with those charged with governance- A description of the form in

which any communications on audit matters will be made. The relevant persons with
whom such communications will be made. Any specific audit matters of governance
interest which it has been agreed are to be communicated

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PKF International Limited is an association of legally independent member firms.