Audit Engagement: Definition | Explanation | Example


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

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

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

And, yes audit fee and term of payment also the significant information that should be included as required by ISA 200.

The engagement letter is the same 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 required to assess client’s backgrounds, nature of 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.

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

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

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

Maybe, if you want to see what audit engagement letter look like, here is the link

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 fee or sometimes call engagement fee
  • Timeline of the fieldwork and delivery of audit report
  • Auditors responsibilities
  • Client responsibilities
  • Auditor right to access financial information and related records (the most important one)

Comment below if you have any questions, Sinra