An engagement letter is a document that details the relationship between an auditor and a client at the beginning of an audit process. It reduces legal liability to third parties as it clearly states expectations from both sides at the start of the relationship and eliminates potential misunderstandings that can cause a delay in the process.
It identifies the entity being audited or reviewed and provides a timeline for the completion of fieldwork. It also identifies which personnel from the company will be collaborating with the auditor during the fieldwork and any additional documentation that may need to be obtained by the audit team.
It sets the scope of the engagement to ensure that the auditor and the client have a clear understanding about what is being performed. Moreover, it helps reduce the risk of costly mistakes and disputes that can arise during the course of an audit, particularly when it comes to changing the nature of the audit or related services that have been requested by management.
It also includes the terms and conditions of the audit, which include the professional fee structure, a disclaimer stating that the audit is limited to professional standards and GAAP purposes and does not extend to fraud detection, as well as other important elements. Moreover, the engagement letter must be signed by authorized representatives from both the firm and the company in order to be effective. In addition, it is recommended that a mediation or arbitration clause be included in the engagement letter in case of a dispute that does not reach resolution during informal negotiations. what is an engagement letter in auditing