## Audit Engagement Letter (SA 210)
### What is an Audit Engagement Letter?
A written agreement (sent by auditor to the client) recording the agreed terms of the audit engagement between the auditor and management (or those charged with governance, as appropriate).
Purpose: Reduce the risk of misunderstanding between auditor and client about scope, responsibilities, and expected outputs.
---
### Mandatory Contents — 5 Key Areas
1. Objective and scope of the audit of financial statements
2. Responsibilities of the auditor
3. Responsibilities of management
4. Applicable financial reporting framework for preparation of the financial statements
5. Expected form and content of any reports to be issued by the auditor, along with a statement that there may be circumstances in which a report may differ from its expected form and content
---
### When Written Agreement is NOT Required
If law or regulation prescribes in sufficient detail the terms of the audit engagement, the auditor need not record them in a written agreement — except to note:
- That such law or regulation applies, AND
- Management acknowledges and understands its responsibilities
---
### Recurring Audits — When to Revise the Letter
Auditor may choose not to send a new letter each year. However, revision is appropriate when:
- Significant change in the nature or size of the entity's business
- Change in legal or regulatory requirements
- Change in management or ownership
- A recent misunderstanding about the terms
### Example 1
Scenario (5 Marks): CA Paras has accepted the audit of an entity. What are the key areas that should be included in the audit engagement letter? Under what circumstances is the auditor not required to record the terms in a written agreement?
Answer:
Key areas: (1) Objective and scope of the audit; (2) Responsibilities of the auditor; (3) Responsibilities of management; (4) Applicable financial reporting framework; (5) Expected form and content of reports to be issued (including note about possible differences).
When written agreement not required: When law or regulation prescribes the terms of engagement in sufficient detail — but the auditor must still note that such law applies and that management acknowledges its responsibilities.
### Example 2
Scenario (PYP Sep 24 – 3 Marks): Mr. J (articled clerk) is part of the engagement team conducting their first audit of a company. He needs to prepare a draft audit engagement letter but is unsure how to proceed. Explain what an audit engagement letter is and what it contains.
Answer:
An audit engagement letter is the written agreement sent by the auditor to the client, recording the agreed terms of the audit engagement. It is in the interest of both parties to have this letter so that possibility of misunderstanding is reduced.
Contents: (1) Objective and scope of the audit; (2) Auditor's responsibilities; (3) Management's responsibilities; (4) Applicable financial reporting framework; (5) Expected form/content of reports to be issued, with a statement that reports may differ from expected form in certain circumstances.