An engagement letter in auditing is a written document that defines the auditor’s responsibilities and limits the scope of services to be provided. A well-drafted engagement letter is an important part of the work paper file and can mitigate liability risks for both the audit firm and its clients. In fact, some malpractice insurance carriers offer reduced premiums to firms that regularly use engagement letters.
The purpose of an engagement letter is to clearly state expectations from both parties at the beginning of any business relationship. It is less formal than a contract, but it is still considered legally binding in the case of litigation. In addition to laying out the audit process, an effective engagement letter will also include any reassurances for the client and any fees that may apply.
A well-drafted engagement letter will lay out the exact services to be provided, any deadlines or performance standards that must be met, the precise sum and schedule of client payments, any performance guarantees, and a termination section that describes how either party can terminate the agreement. It should also cite any services that lie outside of the current agreement but could be added in the future, with estimated costs attached.
While many audit firms anticipate some resistance from their clients in signing the initial engagement letter, they should always explain why it is necessary to prevent potential misunderstandings later on. Additionally, demonstrating that the firm has a mature process to deliver services can give a positive first impression to the client and ease any concerns. what is an engagement letter in auditing