AA - Nov 2021 - L2 - Q5a - Professional and Ethical Considerations, Engagement Letters

AA – Nov 2021 – L2 – Q5a – Professional and Ethical Considerations, Engagement Letters

Question

SA 210: Agreeing to the terms of an engagement states that Engagement Letters are issued to serve as contracts between clients and auditors.

Required:
Justify FOUR (4) terms that could be included in an Engagement Letter in accordance with ISA 210.

Answer

Objective and scope of the audit – The engagement letter should clearly outline the purpose of the audit, including the period to be covered and the extent of work to be performed. This helps to clarify expectations and avoid misunderstandings between the auditor and client.
Responsibilities of the auditor – The auditor’s duties, including conducting the audit in accordance with auditing standards, should be specified to define the limits of the auditor’s work and ensure the client understands what the audit does not cover (e.g., fraud detection).
Responsibilities of the client – The client’s responsibilities, such as the preparation of financial statements and the establishment of an internal control system, should be included. This ensures the client is aware of their role in the audit process.
Basis for audit fees – The engagement letter should state how fees will be calculated, including the time spent, staff involved, and other factors. This helps avoid disputes about fees and allows the client to budget for audit costs appropriately.