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18 Principal Contents of audit Engagement Letter.

Having accepted an appointment as an auditor of a client company, the audit firm should submit an engagement letter to the board of directors of the client company. The engagement letter can be seen as the basis for the contract between the company and the auditor.

The engagement letter should include details of the following:

  •  The objective of the audit of financial statements
  • The responsibilities of the auditor.
  • Management’s responsibilities for the financial statement as described in ISA 200 – Objective and General Principles Governing an Audit of Financial Statements.
  • The financial reporting framework adopted by management in preparing the financial statements i.e. the applicable financial reporting framework
  • The scope of the audit,  including reference to applicable legislation, regulations,  or pronouncements of the professional bodies to which the auditor adheres.
  • Reference to the expected form and content of any reports to be issued.
  • The fact that because of the test nature and other inherent limitations of an audit, together with the inherent limitations of any accounting and internal control system, there is an unavoidable risk that even some material misstatement may remain undiscovered.
  • Arrangements to be made with the predecessor auditor, if any, in the case of an initial audit.
  • Arrangements concerning the involvement of internal auditors and other client staff.
  • The expectation of receiving from management written confirmation concerning representations made in connection with the audit.
  • Unrestricted access to whatever records,   documentation and other information requested in connection with the audit.
  • The basis on which fees are computed and any billing arrangements;
  • Request for the client to confirm the terms of the engagement by acknowledging receipt of the engagement letter.
  • Description of any other letters or reports the auditor expects to issue to the client.
  • Any restriction of the auditor’s liability when such a possibility exists.
  • Arrangements concerning the involvement of other auditors and experts in some aspects of the audit.
  • Arrangements regarding the planning and performance of the audit, including the composition of the audit team;

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