What is the purpose of audit engagement?

Definition

Audit engagement refers to audit performed by an auditor. It is the very first stage of an audit procedure where the client is notified by the auditor that the work pertaining to audit has been accepted by him/her and also provides clarifications with regard to the scope and purpose of audit. To be more specific, audit engagement can be referred to the written letter that the auditor uses to notify the client that he/she would be engaging in auditing services. Thus, the audit engagement procedure is basically a negotiation based on professional terms that takes place between prospective customer and a public accounting entity. This procedure is used for finding new customers and offer accounting related services to different businesses.

The auditor uses the term ‘audit engagement’ when the entity has to undergo the auditing procedure. This could imply varied things and therefore it is necessary that the auditor clarifies what she/he exactly means by the term. Irrespective of the definition followed by the auditor, he/she makes it a point to follow certain specific guidelines and procedure for offering the services.

Full Engagement

See also

• Audit Plan
• Audit Procedures
• Financial Audit

An audit engagement letter can be defined as an agreement that is signed between a client, and an accounting firm, in order to maintain the existing accounting functionality of the business.

This document indicates the beginning of the audit engagement of the company with the audit partner, formally.

The audit Engagement Letter is sent out when the audit process begins in order to avoid misunderstandings relating to the audit process.

The engagement letter is created to document and confirm the appointment of the auditor with the subsequent acceptance of the auditor.

It includes the objective of an audit of financial statements, management’s responsibility for the financial statements, the scope of the audit, in addition to the form of any report or any other communication that should be clarified and agreed upon within the auditor and the engagement partner.

Importance of Audit Engagement Letter

The need for an audit engagement letter mainly stems from the reason for ensuring that there is proper communication between the auditor and the engagement party regarding the scope of work. It also includes subsequent limitations during the course of the audit.

This is a considerably important part because it helps to establish a favorable communication channel between both parties so that there are no expectation gaps in the near future.

In the same manner, it also states the respective duty that the party is going to perform over the course of the contract.

This helps to dissect responsibilities in the sense that the management is responsible for the preparation of financial statements, whereas the auditor is responsible to ensure that these financial statements have not been understated or misused.

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It is highly important to emphasize and focus on the scope of the auditor in this regard, essentially because of the reason that it shows the areas which are supposed to be completed by the auditor.

This subsequently acts as an aid to the auditor in the sense that it helps the auditor to gauge the resources required to complete the audit and the relevant planning that is necessary in this regard.

As a matter of fact, it also talks about the fee that would be paid to the auditor for the services, and when the payment is going to be made.

Therefore, this is the amount that is decided upon well in advance, so that there is no confusion or misunderstandings relating to the financial aspect of the company.

This tends to be important because it helps the audit partner to plan their year well in advance, in terms of the overall clientele they can manage over the year.

The audit engagement letter can simply be termed as a service agreement between the auditor and the company, which is a formality that is supposed to be completed in order to ensure that the company is able to maximize its results, for the best outcomes.

Hence, in this regard, it is imperative that the audit engagement letter can be used in order to minimize the chance of misunderstanding between both parties because most of the clauses would have been agreed upon well in advance.

The audit engagement letter, therefore, acts as proof that the auditor is supposed to take care of the respective agreed-upon components of the audit, so that they are able to achieve better outcomes.

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It helps the auditors plan the audit in a better manner, which is effective in terms of delivering the required results in a much more proficient manner.

In the case of unprecedented circumstances, audit engagement letters are mostly used as tools to solve the dispute, because it includes almost all the important covenants that might occur during the course of the audit itself.

Finally, it can be seen that the audit engagement letter is considered an important phenomenon because it helps the auditor execute the audit process keeping in mind the scope of the audit, and how it has to be executed in order to achieve accurate results.

Conclusion

There is no doubt about the fact that audit engagement letters can be termed as increasingly important tools that can help auditors as well as their clients in establishing a written contract that reflects the agreed-upon terms and conditions of the audit process.

As a matter of fact, audit documentation tends to be an integral part of the overall audit process, and it all starts with the audit engagement letter.

Without this letter, there is room for misunderstandings, and confusion between the parties, which would be highly unproductive, and might result in unfavorable outcomes for both parties.

By Chron Contributor Updated September 15, 2020

When a company has to go through the audit process, an auditor may use the term "audit engagement." This can mean different things, so it is important that the auditor clarify what he means when he uses the term. Regardless of which definition the auditor follows, however, the auditor always follows specific procedures and guidelines for handling the engagement.

An audit engagement very loosely refers to an audit that an auditor performs, reports Accounting Tools. More specifically, it refers only to the initial stage of an audit during which the auditor notifies the client he has accepted the audit work and clarifies his understanding of the audit's purpose and scope. Even more specifically, the term audit engagement can refer to the engagement letter in auditing, that is, the written letter by which the auditor formally notifies the client he will engage in audit services.

When referring to the audit as a whole, audit engagements encompass several distinct steps, which are organized into planning, testing of controls, substantiation or fieldwork and exit or finalization. The first is sending a letter to the client alerting him of the audit. After this initial contact, the client and auditor meet to pinpoint further how, when and why the audit will happen, as well as the resources the auditor will have at his disposal. The auditor then conducts primary surveys to understand the company and the controls in place. The next step is testing the controls and gathering as much information as possible.

Based on the results, the auditor constructs a draft of the formal audit report, which he shares with the client. As the audit work draws to a finish, the auditor and client schedule an exit meeting. The client responds to the findings in the report and the recommendations the auditor has made. The auditor issues a final report and may ask the client to complete a survey about the auditor's performance and the audit results. Auditors complete the audit by following up with the client, normally within six months.

Viewed as only as the first step of the audit process, the intent of an audit engagement is to get the client and the auditor on the same page. The client describes exactly what he needs the auditor to do. This helps the auditor decide whether the audit is feasible and how to approach it. The audit engagement by itself does not produce any viable results or findings – auditors do this during fieldwork – but it allows the auditor to know how, when and why to get those findings. During this initial stage of the audit, the auditor is concerned with understanding the client and the risks that might produce inaccurate audit results.

Auditors generally provide audit engagement letters as one of the final steps in the audit planning stage. The letter summarizes all the information the auditor has gained about the client, the client needs and audit objectives, as well as the scope of the audit and what the client is responsible for doing, suggest Practice Ignition, a company that produces management software for the accounting profession.

Additionally, audit engagement letters clearly indicate the auditor assigned to the audit. They also may indicate additional information the auditor will need during the audit, the auditor's fees, people with whom the auditor will need to speak and how much time the auditor has to finish his work. Also sometimes included are relevant financial and accounting regulations to which the auditors must adhere.

A good audit engagement letter also recognizes that not all clients are familiar with audit procedures and therefore outlines those procedures for clarification. Audit engagement letters are very similar to work contracts in the way they are constructed in that they define duties and relationships, but based on their wording, they are not necessarily legally binding the way a formal contract is.