Lecture 1 Audit Engement Letter

3203: Auditing and Assurance–II
Audit Engagement Letter
Md. Mahadi Hasan

Lecturer,
Department of Accounting & Information Systems
Faculty of Business Studies
University of Dhaka
Audit Engagement Letter
It is in the interest of both client and auditor that the
auditor shall send an engagement letter, preferably before
the commencement of the engagement, to help in
avoiding misunderstandings with respect to the
engagement. The engagement letter documents and
confirms the auditor’s acceptance of the appointment, the
objective and scope of the audit, the extent of the auditor’s
responsibilities to the client and the form of any reports.
Contents of Agreement
(a) The objective and scope of the audit;
(b) The responsibilities of the auditor;
(c) The responsibilities of management;
(d) Identification of the applicable financial reporting
framework; and
(e) Reference to the expected form and content of any reports to
be issued by the auditor i.e Management Letter, if require.
(f) Unrestricted access to whatever records, documentation and
other information requested in connection with the audit
Agreement on Audit Engagement Terms
Contents may include following additional terms:
 Elaboration of the scope of the audit, including reference to applicable
legislation, regulations, ISAs, and ethical and other pronouncements of
professional bodies to which the auditor adheres.
 The form of any other communication of results of the audit
engagement.
 The fact that because of the inherent limitations of an audit, together
with the inherent limitations of internal control, there is an unavoidable
risk that some material misstatements may not be detected, even though
the audit is properly planned and performed in accordance with ISAs.
 Arrangements regarding the planning and performance of the audit,
including the composition of the engagement team.
Agreement on Audit Engagement Terms
Contents may include following additional terms: Con—d
 The expectation that management will provide written representations
 The agreement of management to make available to the auditor draft
financial statements and any accompanying other information in time to
allow the auditor to complete the audit in accordance with the proposed
timetable.
 The agreement of management to inform the auditor of facts that may
affect the financial statements,
 The basis on which fees are computed and any billing arrangement.
 A request for management to acknowledge receipt of the audit
engagement letter and to agree to the terms of the engagement outlined
therein.
Recurring Audits
The following factors may make it appropriate to revise the terms of the audit
engagement or a new letter of engagement:
Any indication that the entity misunderstands the objective and scope
of the audit.
Any revised or special terms of the audit engagement.
A recent change of senior management.
A significant change in ownership.
A significant change in nature or size of the entity’s business.
A change in legal or regulatory requirements.
A change in the financial reporting framework adopted in the
preparation of the financial statements.
A change in other reporting requirements.
Sample Audit Engagement Letter
Ethical Clearance
Ethical Clearance
When a client changes from one accountant to another,

it is usual for the new accountant to send a so-called
ethical clearance letter to the existing accountant
Ethical Clearance
The proposed accountant, who is asked to replace an existing auditor or to
accept nomination as auditor must, save where the company or organization
has not previously had an auditor:
a) Request the prospective Client's permission to communicate with the
existing auditor last appointed. If such permission is refused the proposed
accountant should, in the absence of exceptional circumstances, decline the
Audit Engagement or the nomination.
b) On receipt of permission, request in writing of the existing auditor last
appointed all information which ought to be made available to the proposed
accountant to enable a decision to be made as to whether the Audit
Engagement or the nomination be accepted.
Ethical Clearance
The purpose of an ethical clearance letter is to assist the proposed accountant to
make a decision about whether or not to accept the appointment. Where an ethical
clearance letter is sent to an existing accountant, the proposed accountant is
asking whether there are matters known to the existing accountant which would
inform this consideration of threats to the fundamental principles identified in
IFAC Code of Ethics for Professional Accountants as follows:
Integrity
Objectivity
Professional competence and due care
Confidentiality
Professional behavior
Ethical Clearance
The existing accountant provides a clearance in the
sense that he indicates that there are no matters
known to him which would inform the consideration
of threats to the ethical principles identified in the
Code.
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3203: Auditing and Assurance–II

Audit Engagement Letter

Md. Mahadi Hasan

When a client changes from one accountant to another,

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