Acca aaa s21 Notes

6. The engagement letter
Upon appointment, auditors should send an engagement letter to their new client.
Engagement letters are often regarded as rather dull documents, sent once and then forgotten. 
However, they are of crucial importance because they set out the contractual relationship between 
the auditor and the client. If the engagement letter is not sent out it’s very difficult for an auditor 
subsequently to complaint that the client hasn’t done what was expected, or it might be difficult for 
the auditor to defend the firm against a claim that the auditor has not done what was expected. 
Engagement letters:
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Define the auditor’s responsibilities
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Provide written evidence of the auditor’s acceptance of the appointment.
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Should be sent to the board of directors or audit committee prior to the first audit.
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Identify any reports to be produced in addition to the auditor's report. For example, for banking 
or insurance clients who may come under additional scrutiny.
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Should be updated for all changes. For example, if the auditor begins to undertake tax work for 
the client.
September 2021 to June 2022 exams
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7. Typical contents of an engagement letter
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Description of the objective of an audit: to obtain reasonable assurance whether the financial 
statements are free from material misstatement and issue an auditor's report that include an 
audit opinion.
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Defining responsibilities: management’s are to prepare the financial statements and to set up a 
system of internal control. It is the auditor’s responsibility to audit the financial statements.
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Reference to the applicable financial reporting framework. For example, national legislation (eg 
companies act) and/or IFRS.
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Emphasis that audits depend on sampling that there are no guarantees. The audit looks for only 
material misstatements. It will examine records on a test basis that can only give a reasonable 
assurance.
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The auditors will state that they expect unrestricted access to the company’s records and they 
expect full explanations for any queries they might have.
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They will state that the auditor’s report is a matter between them and the addressees of the 
report (the members of company) and that it should not be relied upon by other parties.
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There will be certain matters about planning the audit, such as arranging the interim audit and 
final audit, attending inventory counts, organising external confirmation of receivables, and 
liaison with the internal audit department.
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Almost certainly there will be something about fees. They should be estimated but subject to 
the proviso that if more work needs to be done, it will be done and additional fees will be 
required.
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Description of the expected relationship between the external auditor and internal audit; how 
the work of internal audit might be reviewed and then relied on by the external auditors.