## Engagement Letter (SA 210 – Agreeing the Terms of Audit Engagements)

### What is an Engagement Letter?

An Engagement Letter (EL) is a written agreement issued by the auditor to the client that records the terms and conditions of the audit engagement. Its primary purpose is to avoid misunderstanding between the auditor and the client.

> Auditor sends the Engagement Letter to the client (Management/Those Charged with Governance).

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### Mandatory Contents of an Engagement Letter

#	Content
i	Objective and Scope of Audit of Financial Statements
ii	Responsibility of Management
iii	Identification of Applicable Financial Reporting Framework (FRF)
iv	Responsibility of Auditor
v	Reference to expected form and content of Audit Report
vi	Statement that circumstances may lead to different form/content of audit report

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### When Law/Regulation Already Prescribes Terms

If law or regulation prescribes sufficient detail about terms of the audit engagement, the auditor need not record them in a written agreement, EXCEPT when law/regulation requires it and management must still acknowledge and understand its responsibilities.

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### Management's Responsibilities (as reflected in EL)

1. Preparation of FS as per applicable FRF

2. Devising Internal Controls necessary for preparation and fair presentation of FS

3. Provide access to all information management is aware of that is necessary for the audit

4. Provide additional information the auditor may request for audit purposes

5. Unrestricted access to persons within the entity from whom audit evidence will be obtained

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### Pre-conditions for Accepting an Audit Engagement

Before accepting an engagement, the auditor must verify two pre-conditions:

1. Management acknowledges and understands its responsibilities (as listed above)

2. The identified FRF is acceptable (i.e., the FRF used for preparing FS is appropriate)

> Both pre-conditions must be satisfied.

If pre-conditions are NOT satisfied:

Communicate with management
Do not accept the engagement (unless required by law or regulation)

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### Objective of SA 210

To accept or continue an audit engagement when:

1. Pre-conditions are satisfied

2. There is a common understanding between the auditor and management/TCWG of the terms of the audit engagement

Worked example

### Example 1

Example – HDFC Bank Audit: HDFC Bank is audited by Rajuk & Co. The FRF used is Ind AS. Before accepting the engagement, the auditor must: (1) obtain management's acknowledgment that they are responsible for preparation of FS under Ind AS and for internal controls, and (2) confirm that Ind AS is an acceptable FRF for HDFC Bank. Only after both pre-conditions are met should the engagement letter be issued.

### Example 2

Example – FRF identification: A company wants its FS prepared under IGAAP but the auditor identifies that the company is required by SEBI to follow Ind AS. The auditor should flag this mismatch – the FRF identified by management is not acceptable. This is a failed pre-condition; the auditor should not accept until resolved.

⚠️ Common exam mistakes

Confusing the purpose of an engagement letter as merely a 'formality' – it is a legally significant document that defines scope and avoids disputes.
Forgetting that management's responsibility includes providing unrestricted access to persons within the entity (not just documents).
Assuming that if law prescribes terms, no written agreement is ever needed – the exception is when law/regulation itself requires the written acknowledgment.
Treating either pre-condition (management acknowledgment OR FRF acceptability) as sufficient alone – BOTH must be satisfied.
Not linking the identification of FRF to management's responsibility: it is management, not the auditor, who identifies the applicable FRF.

Bare-Act text Para 9 & 10 · SA 210 – Agreeing the Terms of Audit Engagements (ICAI) · click to expand

The auditor shall agree the terms of the audit engagement with management or those charged with governance, as appropriate. The agreed terms shall be recorded in an audit engagement letter or other suitable form of written agreement.

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Engagement Letter and Pre-conditions for Audit (SA 210)

Worked example

⚠️ Common exam mistakes