AA - Audit and Assurance

The Engagement Letter

TERMINOLOGY USED
Engagement letter: An agreement that is put in place at the start of the audit process. The engagement letter is
prepared once the acceptance stage is concluded.

PURPOSE AND CONTENTS OF THE ENGAGEMENT LETTER

Purpose of the engagement letter:

1. To minimize the risk of misunderstandings;

2. To explain the audit process and the terms and conditions; and

3. For accepting the audit process in writing.

ISA 210 requirements:

Contents of the engagement letter (ISA 210):

1. Objective of the audit: Sufficient appropriate evidence to form an independent opinion;

2. Scope of the audit:

a. Plan and perform audit procedures to audit;

b. Statement of financial position;

c. Statement of profit or loss;

d. Statement of changes in equity; and

e. Statement of cash flows.

3. Auditor’s responsibilities:

4. Client management responsibilities:

5. Financial reporting framework (for example IFRS);

6. Form and contents of any reports used:

a. The formal written audit report will show the audit opinion; and

b. Any control deficiencies will also be reported in writing in the form of the management letter or
report to management.

7. Other matters that may be included:

a. Confirming the use of experts during the audit engagement;

b. The basis of fees;

 c. The reliance of some of the internal auditor's work if appropriate;

d. Acknowledgement of any specific regulations relating to the audit;

e. Provision of additional services;

f. The limitations of the audit; and

g. Timings of any communications during the audit.

The importance of the engagement letter being reviewed every year:

1. Information may be out of date;

2. Auditors may provide services not included in the engagement letter;

3. Fee basis may have changed;

4. Not received confirmation that the management accept their responsibilities; and

5. ISA 210 is not being followed.