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The auditor should establish an understanding in writing with management or those charged with governance² about the services to be performed for each audit, review of a public company’s financial statements, or agreed-upon procedures for engagement. (AU-C 210.09) The understanding should include:

1 The engagement’s objectives and scope

2 Management’s responsibilities

3 Auditor’s responsibilities

4 The audit’s limitations, the inherent limitations of internal control, and the risk that some misstatements may not be detected

5 Financial reporting framework

6 Expected form and content of the report

(AU-C 210.10)

In addition, the auditor may want to:

 Elaborate on the scope of the audit by referencing regulations, laws, GAAS, ethical codes, and pronouncements of professional bodies, as applicable.

 Identify any communications in addition to the auditor’s report.

 Discuss audit planning and performance, including composition of the audit team.

 Remind management about the expectation of written representation, the agreement to make available draft financial statements on a timely basis, and the agreement for management to inform the auditor of subsequent events or facts discovered after the date of the financial statements that may affect the financial statements.

 Detail fees and billing arrangements.

 Request management to acknowledge receipt of the engagement letter and to agree to the terms by signing the letter.

(AU-C 210.A23)

The auditor may also choose to address arrangements concerning the involvement of other auditors, specialists, internal auditors and other entity staff, and predecessor auditors. Restrictions on auditor’s liability, when not prohibited; audit documentation to be provided to other parties; additional services; arrangements with component auditors; and any other agreements with the entity may be included in the engagement letter. (AU-C 210.A24)

If the auditor fails to establish an understanding, the auditor should decline the engagement. (AU-C 210.08) A sample engagement letter is included at the end of this chapter.