Definition
An engagement letter documents the terms of the engagement before work starts. For an audit, AU-C 210 requires it to state the objective and scope, the auditor's responsibilities, management's responsibilities, the applicable financial reporting framework, and the expected form of reports. Review and compilation letters follow AR-C 90 and AR-C 80. Fees, deadlines, and use of specialists commonly appear alongside the required content.
Why it matters in an audit or review
The letter fixes the shared understanding that later disputes hinge on. It records that management accepts responsibility for the financial statements and for internal control relevant to preparing them. It also guards against the engagement drifting in scope. Auditors confirm whether the terms need updating each year, particularly after a change in management or reporting framework.
Example
Illustrative: a client asks mid-engagement for help drafting disclosures. The firm checks the letter, finds nonattest services are not covered, issues an addendum, and documents safeguards for independence before starting.
Common mistakes
Reusing last year's letter without updating the framework, deadlines, or fee terms.
FAQ
Must the client sign it?
AU-C 210 requires the auditor to obtain management's agreement to the terms, which the letter documents. A signed copy is the usual evidence. Without agreement, the auditor does not accept the engagement.
Sources
- AICPA, AU-C Section 210, Terms of Engagement (agreement on terms, engagement letter content)
- AICPA, AR-C Section 80, Compilation Engagements
- AICPA, AR-C Section 90, Review of Financial Statements
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error