Audit Engagement Letter

Auditing standards require that the auditor and the client should agree on
the terms of the engagement.

The agreed terms must be in writing and the usual form would be a letter of
engagement.

Any other form of appropriate contract, however, may be used. It is a written

contract between the auditor and the client, stating both parties’
understanding of the professional relationship?

It is in” the interest of both client and auditor that the auditor sends an
engagement letter, preferably before the commencement of the engagement,
to help in avoiding misunderstandings concerning 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 responsibilities to the client and the form of any reports.

Issuance of the engagement letter is one of the procedures to be followed

before the commencement of an audit and is in response to the appointment
for a new audit assignment.

Engagement letter is a sent by an auditor to his client, after the receipt of

communication regarding his appointment, but preferably before the
commencement of engagement, spewing out the extent of his responsibilities
in order to avoid any misunderstanding with respect to his engagement and
documents and confirming the acceptance of appointment, the objectives and
scope of audit, the extent of responsibilities and the form of reports to be
made to the client.
 Objectives of Engagement Letter
The main objectives of an engagement letter are as follows:

1. It defines clearly the extent of auditor’s responsibilities and to minimize

the possibility of any misunderstanding between the client and the auditor.
2. It provides written confirmation of the auditor’s acceptance of his
appointment the scope of an audit and the form of his report.
3. The client becomes aware of the statutory responsibilities of the
directors which in no way are diminished by the appointment of an auditor.
4. Management is informed that the audit tests would be based upon the
results of an evaluation of internal control.
5. The client has explained the statutory requirements of the company’s
ordinance and through the matters to be reported are satisfied by law; the
auditor would be free to report on the matter in respect of which he is not
satisfied.
6. The client becomes informed about the other professional services that
the auditor can provide.
7. The client is briefed that the discovery of fraud is not the main aim of
the audit.
8. The scope of special or additional work is also determined.
9. Basis of computation of frees is brought to the knowledge of the client.

Contents of Engagement Letter

The contents of an engagement letter will be decided in the light of
requirements of each client, but every such letter would normally cover the
following matters:

1. Auditor’s Responsibilities: The engagement letter should explain die

statutory and professional duties and reporting responsibilities.
2. Management’s Responsibilities: The engagement letter should point
out the management’s statutory responsibilities for maintaining proper
accounting preparation of financial statements, an institution of internal
control, selection and application of accounting policies, and safeguard of
assets.
3. Scope of Audit: It should be indicated that the audit will be conducted
following the international auditing standards and have regard to relevant
international statements on auditing. It should be pointed out that the auditor
would satisfy himself:
o by conducting adequately necessary tests and procedures;
o the extent of substantive tests will depend upon an assessment of
the accounting system and proper evaluation of internal control;
o he will expect relevant and reliable evidence from the
management in matters where independent audit evidence is not available.
4. Management’s Representations: It should indicate that the auditor,
before finalization of audit, -may seek written representation from the
management in respect of matters having a material effect on financial
statements.
5. Irregularities and Fraud: The engagement letter should make it clear
that the responsibility for the prevention and detection of irregularities and
fraud rests with management. It should be made clear that the main purpose
of an audit is not the discovery of fraud and defalcations.
6. Other services: The engagement letter should adequately describe the
nature and scope of services that an auditor may carry out in addition to his
responsibilities as an auditor.
7. Fees: The fees and the basis on which the same is computed.
8. Client’s Confirmation: The engagement letter should include a request
to management that they confirm in writing an agreement to the terms of an
engagement letter.
To the Board of Directors or the appropriate representative of senior
management:

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 using this letter. Our audit will be made with the objective of our
expressing an opinion on the financial statements.

We will conduct our audit following International Standards on Auditing (or

refer to relevant national standards or practices). Those Standards 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 notice.

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 audit.

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 progresses, 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
required.

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 statements.

XYZ & Co.

Acknowledged on behalf of ABC Company by

(signed)
Audit Planning
Audit planning can be done only when, the auditor is having knowledge of the
business of the client.
 An audit is a professional service to a client. The review of accounting, financial
and other operations form a basis of such service. Before commencing audit, an
auditor must prepare himself well. Preparation for an audit relates to audit
planning, preliminary preparations by the auditor, audit program, audit note book,
audit working papers, audit evidence, commencement of a new audit, test
checking, and routine checking.
 Meaning of Audit Planning
 Planning is required to complete the audit effectively within the specified time.
Audit planning is a process of deciding in advance what is to be done, who is to do
it, how it is to be done and when it is to be done by the auditor in order to have
efficient and effective completion of work.
 Audit planning can be done only when, the auditor is having knowledge of the
business of the client. It helps in achievement of objectives of audit and enables the
auditor to cover different aspects of audit work in a systematic manner within a
preset time frame. It enhances the quality of audit work. Audit plans should cover
knowledge about client’s accounting systems and policies, internal control
procedures and coordinating the work to be performed. Plans should be flexible so
that they can be developed or revised as and when required by the auditor.
 Benefits (or) Advantages of Audit Planning
 An efficient and effective audit plan provides the following benefits:
            Accomplishment of Objectives: Audit plan ensures that it provides right
means to accomplish audit objectives. Further it also ensures that appropriate
attention is devoted to important areas of audit.
            Identification of Problems: A well drawn and established audit plan helps in
identifying potential problems.
            Timely Completion of Work: It ensures that work is completed properly
within the specified time and no important area is left out. It also ensures that all
important areas of management receive attention.
           Facilitates Coordination: It facilitates coordination of the audit work done by
auditors and other experts.
 

           Better Audit Work: It helps in improving the quality of audit work and
provides promptness and perfection in audit performance.

Factors Affecting Audit Planning

The following factors should receive due consideration while planning:
     Size of the company and nature of its operations.
     Accounting system, internal control and adherence to standard.
     Environment in which the company operates.
      Previous experience with the client; and    Knowledge of client’s business.

Audit Program
An audit program is a detailed plan of the auditing work to be performed,
specifying the procedures to be followed in verification of each item and the
financial statements and giving the estimated time required.

MEANING
 
An audit program is a detailed, written statement designed by the auditor
indicating the work to be performed by the audit assistants, specifying the time
limit for completion of work, instructions and guidance to the audit staff. In short,
it is a tool for planning, directing and controlling the audit work.
 An audit program is a detailed plan of the auditing work to be performed. It
specifies the procedures to be followed in the conduct of audit more efficiently.
The auditor outlines the whole procedure of audit from beginning till the
finalization of audit report. Audit program is generally contained in the audit
notebook.
 

Definition
 Prof. Meigs defines an audit program as, “an audit program is a detailed plan of
the auditing work to be performed, specifying the procedures to be followed in
verification of each item and the financial statements and giving the estimated time
required.”
 Features (or) Characteristics of an Audit Program
 The features of an audit program may be of the following:
 1.        It is a set of procedures to be adopted to conduct the audit more efficiently.
 2.        It is a written scheme designed by the auditor.
 3.        It is a blue print of the audit work.
 4.        It facilitates delegation of work, based on the capabilities of audit staff.
 5.        It acts as evidence in future for the audit work being performed.
 6.        It specifies the work to be done by the audit staff, the manner and time limit
for completion of the work.
 Objectives of Audit Program
The following are the objectives of audit program
1.        To provide clear instructions to the audit assistants specifying the nature of
work to be performed and fixing the time span for completion of each work.
 2.        To facilitate coordination among various parts of audit work.
 3.        To ensure uniformity in the performance of audit work and to avoid
duplication and repetition of work.
 4.        To attain a fair allocation of work among audit team.
 5.        To fix responsibility and accountability of each audit assistant.
 6.  To serve as a guide for planning the audit work in future.
 7.        To serve as evidence in future showing the date of completion of audit work,
methods or procedures undertaken, persons involved in completion of audit
work etc.
 

Contents of an Audit Program
 The following are the details of an audit program:
 1.      Name of the client.
 2.      Nature of operations and business of client.
 3.      Review of system of internal check.
 4.      Date of commencement of audit work.
 5.      Duration of audit work.
 6.      Accounting system followed in client organization.
 7.      Review the report of the previous auditor.
 8.      Review the remarks, instructions or objections raised in the previous audit
report.
 9.        Examine the various ledger accounts and subsidiary books.
 10.   Examine the statutory books and registers, profit and loss account, and
balance sheet.
 Advantages of an Audit Program 
An audit program can give the following advantages:
 1.        Helps in Estimation and Division of Work: Audit Program helps
in estimating the quantum of audit work in advance and also helps in dividing the
work among the audit assistants based on their capabilities.
 2.        Helps in Fixation of Responsibility: It enables to fix responsibility on the
audit assistants by clearly defining the scope of work.
 3.        Helps in Future Planning: Audit program serves as a basis for planning the
audit work for subsequent year.
 4.        Serves as a Guide:  It  serves  as  a valuable guide for the audit staff in
execution of the audit work for succeeding years.

 5.        Valuable Evidence: It serves as an evidence for the work done as initials of

those who have done the particular work are appended to it. The auditor can
produce the audit program as a proof when a charge of negligence is brought upon
him.
6.        Uniformity: It provides for uniformity in audit work as the same work will be
done every year.
7.        Continuity: When an audit staff goes on leave others can continue the work
by referring to the audit program, hence, audit program provides for continuity of
work.
 8.        Coordination: If facilitates coordination and helps in supervising the work of
the audit staff.
 Disadvantages of an Audit Program
 The disadvantages that may be experienced by conducting audit as per
predetermined audit program are -
 1.  Mechancial: When audit work is conducted mechanically every year based on
the audit program, it causes monotony and boredom to the auditor and audit staffs.
 2.  No Quality in Work: The audit staff will be more interested to complete the
work in time rather than to maintain any standard in the work.
 3.  Loss of Initiative: Audit staff cannot take their own decisions and they are
compelled to comply with the audit program. Hence, an efficient audit clerk loses
his initiative and interest as he cannot make any suggestions.
 4.  Rigidity: A rigid and inflexible audit program cannot be laid for all types of
business. During the course of audit, new areas to be verified may come to the
notice of the audit staff. Unless the audit program is revised, such areas may
escape from auditing.
 5.  Shelter for Inefficient Staff: Inefficient audit staffs conceal their mistakes or
weakness on the basis of audit program. Hence, it provides shelter for inefficient
audit staff.
 6.        Unsuitable: Pre-determined audit program is not suitable for small business
organizations.