Audit Engagement letter
Evaluating Internal Audit Work/Review/Controlling
Where the external auditor has decided to place reliance on the
work of internal auditor, he should
review the working papers to satisfy himself as to:-
i) Audit programs are adequate.
ii) The work is performed by trained staff and the work of
assistants is properly supervised,
reviewed and documented.
iii) Sufficient appropriate audit evidence was obtained.
iv) Conclusions made are appropriate.
v) Reports prepared are based on the work done.
vi) Exceptions or unusual items have been properly resolved. The
external auditor should
record all the working he has received. The external auditor
should also test the work of
Testing the Work of Internal Auditing
It can be done in the following ways:
i) Re-performing the work done by internal auditor, on test
basis, to ensure that the same
results are achieved;
ii) Selecting a few similar items and perform independent test;
iii) Observation of internal auditing procedures.
Terms of Audit Engagements
Meaning and Objective
Audit Engagement Letter is written by the auditor to his client.
The letter documents terms of
engagement as agreed between the auditor and the client.
Following are the components of Audit Engagement Letter
i) The objective of financial statements.
ii) Management’s responsibility for financial statements.
iii) The scope of the audit.
iv) The form of any reports or other communications.
v) The fact that due to certain unavoidable factors, the
auditors may not be able to detect all
material misstatements due to fraud or error.
vi) Requirement of unrestricted access to records etc.
i) Arrangements regarding the planning of the audit.
ii) Expectation of receiving written representations.
iii) Request for confirmation of terms of engagement.
iv) Description of any other letters or reports the auditor
expects to issue to the client.
v) Basis for computation of fees.
Contents to be included under Special Circumstances
i) Arrangements concerning the involvement of other auditors,
experts, internal auditors and
other client staff.
ii) Arrangements to be made with predecessor auditor, in case of
initial audit only.
iii) Restriction on auditor’s liability, if any.
iv) Reference to any further agreements between the auditor and
Note: A specimen engagement letter as given in the AS is given
Audit of Components
In case of components (branch, subsidiary or division) the
auditor has to decide whether to send a
separate engagement letter for the component. It would depend on
i) Who appoints auditor of the component.
ii) Whether a separate audit report is to be issued on the
iii) Legal requirements.
iv) The extent of any work performed by other auditors.
v) Degree of ownership by parent.
vi) Degree of independence of the component’s management.
Should auditor write an engagement letter every year? Answer to
this question is dependent on the
i) If client misunderstands the objective and scope of the
ii) Any revised or special terms of engagement.
iii) A recent change of senior management, board of directors or
iv) A significant change in nature or size of the client’s
v) Legal requirements.
Example of an Audit Engagement Letter
The following letter is for use as a guide in conjunction with
the considerations outlined in this ISA
and will need to be varied according to individual requirements
To the Board of Directors or the appropriate representative of
You have requested that we audit the balance sheet of …………..as
of …………., and the related
statements of income and cash flows for the year then ending. We
are pleased to confirm our
acceptance and our understanding of this engagement by means of
this letter. Our audit will be made
with the objective of our expressing an opinion on the financial
We will conduct our audit in accordance with International
Standards on Auditing (or relevant
national standards or practices). Those ISAs require that we
plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatements. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation.
Because of the test nature and other inherent limitations of an
audit, together with the inherent
limitations of any accounting and internal control system, there
is an unavoidable risk that even some
material misstatements may remain undiscovered.
In addition to our report on the financial statements, we expect
to provide you with a separate letter
concerning any material weaknesses in accounting and internal
control systems, which come to our
We remind you that the responsibility for the preparation of
financial statements including adequate
disclosure is that of the management of the company. This
includes the maintenance of adequate
accounting records and internal controls, the selection and
application of accounting policies, and the
safeguarding of the assets of the company. As part of our audit
process, we will request from
management written confirmation concerning representations made
to us in connection with the
We look forward to full cooperation with your staff and we trust
that they will make available to us
whatever records, documentation and other information are
requested in connection with our audit.
Our fees, which will be billed as work progress, are based on
the time required by the individuals
assigned to the engagement plus out-of-pocket expenses.
Individual hourly rates vary according to the
degree of responsibility involved and the experience and skill
This letter will be effective for future years unless it is
terminated, amended or superseded.
Please sign and return the attached copy of this letter to
indicate that it is in accordance with your
understanding of the arrangements for our audit of the financial
XYZ & Co.
Acknowledged on behalf of
ABC Company by
Name and Title