An engagement letter in auditing is a written agreement that defines the scope of an assurance engagement. It also clarifies the auditor’s responsibilities and specifies the fees for the engagement. While it is common for disagreements to arise during an audit, an engagement letter will help reduce misunderstandings that may lead to malpractice claims. Obtaining an engagement letter is a standard practice and is recommended by many malpractice insurance carriers.
Providing an effective audit engagement letter benefits both the client and the firm. For the client, it sets boundaries on what the auditor is expected to do and eliminates any surprises at the end of the engagement. It also helps prevent what is known as scope creep – the gradual expansion of an audit without clear boundaries. From an accountant’s perspective, it provides a way to document the nature of an assurance engagement, which helps limit malpractice claims.
An engagement letter should include a clear and concise description of the scope of an assurance engagement, including the auditor’s responsibilities and the format of reports. It should also clearly establish the professional fee structure, which can be stated as a range or per hour, and include billing rates, travel and direct cost reimbursement, and absorption of start-up costs. In addition, a disclaimer should be included to make it clear that the audit is limited to professional standards and GAAP purposes, and does not entail detection of fraud or irregularities. Finally, an engagement letter should provide a detailed timeline for the completion of the work. what is an engagement letter in auditing