Contents of an Engagement Letter

The engagement should outline clear the client’s statutory duties and the auditor’s statutory and professional responsibilities and duties. The client’s statutory responsibilities include keeping proper books of accounts as stipulated Companies Act Cap 486 section 147. The auditor’s statutory responsibilities include preparing audit reports as stipulated in the Companies Act Cap 486 section 156 and 162 and other provisions. The auditor’s professional responsibilities include accounting and advising the client on compliance to standards, regulation and the necessary legislation. The actual
contents are explained here below.

1. Responsibilities and scope of the Audit
The letter should explain the principal statutory responsibility of the client and the statutory and professional responsibility of the auditor. In case of a company, it should be indicated that it is the statutory responsibilities of the client to main proper accounting records and to prepare financial statements which a true and fair view and comply with the Companies Act Cap 486 and other relevant legislation and regulations. It should also indicated that the auditor’s statutory responsibilities include making a report to the members stating whether in his opinion the financial statements gives a true and fair view and whether they comply with Companies Act Cap 486 and other regulations and legislation. It should be explained that the auditor has an obligation to satisfy himself whether or not the director’s report contains any matter that are inconsistent with the audited financial statements.

Furthermore, it should be indicated that the auditor has a professional responsibility to report if the financial statements do not comply with in any material respect with Internal Accounting Standards. The scope of the audit should be explained explicitly. In this connection, it should be pointed out that the audit will be conduct in accordance with approved Auditing Guidelines and regard to relevant Auditing Guidelines. It should be indicated that:

  • The auditor will receive an understanding of the accounting system in order to assess its adequacy as a basis for the preparation of the financial statements
  • The auditor will expect to obtain relevant and reliable evidence sufficient enough to enable him draw reasonable conclusion therefrom.
  • The nature and extent of the tests will vary according to the auditor’s assessment of the accounting system and where he wishes to place reliance upon it, the system of internal system.
  • The auditor will report to the management any significant weakness in, or observation on, the client’s system which come to his notice and which he thinks should be brought to the management’s attention.

Where appropriate, reference should be made to recurring special arrangement concerning audit. These could include arrangements in respect of internal auditors, divisions, overseas subsidiaries, other auditors and (in the case of a small business managed directors who are the major shareholders) significant reliance of supervision the directors.

2. Representation Management
Where appropriate it should be indicated that prior to the completion of the audit, the auditor may seek written representation from management on matters having a material effect on the financial statements.

3. Irregularities and Fraud
The responsibility for the prevention and detection of irregularity and fraud rests with the management and this responsibility is fulfilled mainly through the implementation and continued operation of an adequate system of internal control. The engagement letter should make this clear. Furthermore, it should be explained that the auditor will endeavour to plan his audit so that he has reasonable expectation of detecting material misstatements in the financial statements resulting from irregularities or fraud, but that the examination should not be relied upon to disclose irregularities and frauds which may exists.

4. Accounting and Taxation Services
The auditor may undertake, for the company, services in addition to carrying out his responsibilities as an auditor. An engagement letter should adequately describe the nature and scope of those services. In this case of accounting services, the letter should distinguish the accountant’s and the client’s responsibilities in relation to them and the day to day book – keeping, the maintenance of all accounting records and the preparation of financial statements. Preferably this should be done in a separate letter but such services may form the subject to a section in the audit engagement letter.
In the case of the provision of taxation services, the responsibilities for the various procedures such as preparation of tax computations and submission of return to the relevant authorities should be clearly set out, either in a section of the main letter or in a separate letter. Where accounting, taxation or other services are undertaken on behalf of an audit client, information may be provided to members of the audit firm other than those engaged on the audit. If
this is case, it may appropriate for the audit engagement letter to indicate that the auditor is not to be treated as having notice, for the purpose of his audit responsibilities of the information given to such people.

5. Fees
Mention should normally be made of fees and of the basis on which they are computed, rendered and paid.

6. Agreement of Terms
The engagement letter should include a request to management that they confirm in writing the agreement to terms of the engagement. It should be clearly understood that, when agreed, the letter will give rise contractual obligation and it precise content must therefore be carefully considered. In the case of a company, the auditor should request that the letter of acknowledgement be signed on behalf of the board.

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