AA – Nov 2020 – L2 – Q5a – Regulatory Framework and Audit Responsibilities

Explain the purpose of an engagement letter and key information it should contain.

Question

ISA 210: Agreeing the terms of audit engagements requires that auditors should issue a letter of engagement before commencement of the audit.

Required:
i) What is the purpose of an engagement letter?
(1 mark)

ii) Identify FOUR (4) important pieces of information that the engagement letter should contain.
(4 marks)

Answer

i) Purpose of an Engagement Letter:
The purpose of an engagement letter is to set clear expectations on both sides (the client and the audit firm) regarding the terms of the audit engagement, ensuring that both parties understand their respective responsibilities and the scope of the audit.

ii) Important Information in an Engagement Letter:

Objective of the Audit: This should detail the purpose of the audit and what the audit aims to achieve.
Responsibilities of the Auditor: The letter should specify the auditor’s responsibilities, including the scope and nature of the audit work.
Management’s Responsibilities: It should outline management’s responsibilities for preparing the financial statements and maintaining effective internal controls.
Scope of the Audit: This includes references to applicable legislation, regulations, or pronouncements of professional bodies, as well as the form of any reports or communications that will result from the engagement.

(1 mark for the purpose, 1 mark for each of the four pieces of information – 5 marks total)