An engagement letter in auditing is a written communication from an auditor to the client, which serves as confirmation of the acceptance of his appointment, the extent of his responsibilities and the form of reports to be made to the clients. It helps to eliminate any misunderstanding between the parties and is an essential tool for preventing any litigation.

A well-drafted engagement letter will include a description of the services to be performed and provisions for fees. It will also identify the entity to be audited, reviewed or compiled and provide a description of the financial statements to be examined and any exceptions to examination. It will also contain an explanation of the auditor’s statutory and professional duties, including his responsibility to detect irregularities, the importance of management’s cooperation and the availability of relevant and reliable evidence.

It will also include the timetable for completion of the engagement and an estimate of the total fees payable. It will also ask for confirmation, in writing, that the client has read and understood the terms of the agreement. It may also include a mediation or arbitration clause in the event that a legal dispute arises.

While an engagement letter is not a requirement under generally accepted auditing standards, it does serve several key purposes. They clarify the extent of an auditor’s responsibilities and help to prevent misunderstandings between the parties, while also decreasing the vulnerability of accountants to legal risks. It is highly recommended that all businesses use an engagement letter when entering into a service relationship with an auditor. what is an engagement letter in auditing