An engagement letter in auditing is a document that defines all the stipulations of an auditor’s relationship with a client. It includes details about the scope of the auditor’s responsibilities, a professional fee structure and the form of reports to be presented to the client. Normally, it is sent soon after the auditor’s acceptance of appointment and before commencing the audit. This helps to minimize any misunderstandings concerning the extent of the auditor’s responsibilities and documents any acceptance of the terms of the agreement.
An effective engagement letter is an essential tool for both the auditor and the client. It prevents scope creep by setting boundaries on the audit and ensuring that it stays within its predetermined limits. It also sets expectations for both parties and can include guidance around managing disputes. In the event that a dispute does arise, an engagement letter can also include mediation or arbitration clauses to help resolve the matter without formal legal action.
Many auditors or accountants anticipate resistance from clients when it comes to signing the initial engagement letter, but this can be alleviated by explaining the purpose of the document and providing an example. It is also helpful to include a brochure that discusses the importance of the document, which can be used to educate the client about its contents.
Finally, obtaining an authorized signature or board member approval of the engagement letter is vital. This helps to document that the client has read the letter and understands its terms, which is an important step in avoiding disputes down the road. what is an engagement letter in auditing