Many people are familiar with contracts, but the nuances of contractual requirements related to auditing are not as widely understood. A well drafted Audit Engagement Letter is one of the best ways to protect your company from potential legal disputes with clients while also ensuring that all parties have an accurate understanding of the scope and expectations of the audit process. In this article we will explore why Audit Engagement Letters are important, how they are prepared, and the required and recommended terms that should be included in an engagement letter.

The purpose of an engagement letter is to document the scope of the work, who is responsible for executing the audit, and when the audit should be completed. The letter should include the auditor’s professional fee structure and provide specific provisions for travel and direct cost reimbursement. Additionally, the engagement letter should clearly state that professional fees are not contingent upon the results of the audit and that any investigations regarding fraud or other illegal activities are outside the scope of the engagement.

Typically, an audit engagement letter is issued once verbal confirmation of the appointment has been received and is sent prior to the commencement of the audit. In the case of parent companies that have subsidiaries, each subsidiary should receive a separate audit engagement letter. It is generally considered best practice that the client should keep a copy of the audit engagement letter and update it annually to ensure that all relevant information and access requirements are documented.

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