Briefly explain the nature and purpose of a letter of engagement and under what circumstances would it be appropriate for an external auditor to issue a new letter of engagement?

A letter of engagement is basically a statement issued by the auditor to his client preferably before the commencement of the audit to help avoid mis-understandings with respect to the engagement.

The letter documents and confirms the auditor‘s acceptance of the appointment, the objective and scope of the audit, the extent of auditor‘s responsibilities to the client and the form of any reports.

It enables the client and auditor know and understand their responsibilities. It also reminds management of their duty towards accounts and the internal control system.

It would be helpful to the auditor in case of supporting himself when charged with negligence.

– When there is indication that the client mis-understands the objective and scope of the audit or he issues new instructions.
– There is a revised or special term of engagement.
– When there is recent change in senior management, B.O.D or ownership.
– When there‘s significant change in nature and size of client‘s business.
– Legal requirements or enforcement of a new auditing guideline etc.

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