Audit Engagement: Definition | Explanation | Example

Overview:

Audit engagement basically refers to the engagement of audit services that auditor and audit clients engage in before performing audit activities.

The engagement letter will be signed by both parties by listing down all the significant terms and conditions of engagement.

Those terms include the scope of the audit, the objective of the audit, the auditor’s responsibilities on the financial statements, and the client’s responsibilities on the financial statement.

And, yes audit fees and terms of payment are also significant information that should be included as required by ISA 200.

The engagement letter is the same as to contract however most of the audit firms use these words as it is more professional.

This letter, by the way, is professionally designed as it represents the firm’s credibility.

Audit standard to deal with audit engagement

If the audit firm follows the international standard on auditing, then the standard that they should refer to when they have any issue related to the engagement letter is ISA 200.

This standard outline what auditor should do before they sign and accept the audit work.

For example, auditors are required to assess client’s backgrounds, the nature of the business, and sources of funds to run the business to ensure that customers are legally operating.

This is the first thing to do.

Second, auditors might need to check if the firm has enough resources to perform the firm or not. Resources here mean both staff headcount and competency.

If the firm does not have enough resources, the audit engagement should not be accepted.

Related article  Summary of ISA 200: Objective of Independent and Conduct of Auditor

In general, the process of drafting audit engagement is firstly done by audit managers as he or she obtain the initial information after winning the audit client.

That meant most of the terms and conditions were agreed already by both parties.

Yet, the official documents need to be issued so that if there is any argument between the firm and the client, then both parties will check the details with an engagement letter.

Maybe, if you want to see what an audit engagement letter looks like, here is the link https://assets.documentcloud.org/documents/268335/citi-pwc.pdf

As you can see, the important information that should be included in the engagement is:

  • Client background, for example, the nature of the business, location, key management, etc
  • Scope of works
  • Objective of audit
  • Type of financial framework that client use
  • Audit fees sometimes called engagement fee
  • Timeline of the fieldwork and delivery of the audit report
  • Auditors responsibilities
  • Client Responsibilities
  • Auditor’s right to access financial information and related records (the most important one)

Here is the sample of Agreed-up procedure engagement letter:

[Your Name] [Your Address] [City, State, Zip Code] [Date]

[Client Name] [Client Address] [City, State, Zip Code]

Dear [Client Name],

Re: Engagement Letter for Agreed-Upon Procedures Engagement under ISRE 4400

We are writing to confirm our understanding of the agreed-upon procedures engagement for [Client’s Company Name]. This letter outlines the terms, objectives, and responsibilities associated with the engagement.

1. Objective of the Engagement: The objective of this agreed-upon procedures engagement is to perform specific procedures on subject matter information [or specific aspects thereof], as agreed between [Client Name] and ourselves. The procedures are defined in the engagement letter and report the findings based on those procedures.

2. Scope of the Engagement: The engagement will encompass the performance of agreed-upon procedures as detailed in the attached Schedule of Agreed-Upon Procedures. This schedule outlines the specific procedures we will perform, and we will report our findings based on those procedures.

3. Responsibilities:

  • [Client Name] is responsible for providing access to all necessary records, documents, and information relevant to the agreed-upon procedures.
  • We will perform the procedures in accordance with ISRE 4400 and other applicable professional standards.

4. Timing: The agreed-upon procedures engagement will commence on [start date] and is expected to be completed by [end date]. However, the timeline may be subject to change based on the complexity of the procedures and other factors.

5. Fees: Our fees for this engagement will be based on the time and level of expertise required, as well as other factors. We will provide you with a detailed fee estimate before commencing the engagement.

6. Reporting: Upon completion of the procedures, we will issue a report that presents the findings based on the agreed-upon procedures. The report will be addressed to [Client Name].

7. Confidentiality: We will maintain the confidentiality of all information obtained during the engagement, as required by professional standards and regulations.

8. Governing Law: This engagement letter is governed by the laws of [your jurisdiction].

Please sign and return a copy of this engagement letter to confirm your acceptance of its terms. If you have any questions or require further clarification, please do not hesitate to contact us.

We appreciate the opportunity to perform these agreed-upon procedures for your organization. Thank you for entrusting us with this important engagement.

Sincerely,

[Your Name] [Your Title] [Your Firm Name]