The engagement letter serves the following purpose:-
i) The letter defines the scope of work to be carried out and the respective responsibilities of the auditor and the client under the engagement. This helps in avoiding misunderstandings between the client and the auditor as regards to the scope of the work to be carried out and the respective responsibilities of both parties.
ii) The letter documents and confirms the auditor‘s acceptance of the appointment
iii) It explains the forms of any reports to be issued under the engagement
iv) To educate the client on: –
– His duty to maintain proper books of accounts and to prepare financial statements that show a true and fair view.
– His duty to prevent errors and frauds.
– His duty to provide all the necessary information
– That the audit should not be relied upon to detect errors and frauds.
– To explain that the audit will be carried out on a test basis.
– Basis of charging his fees.
v) Minimize auditor‘s liability to third parties. The auditor may include a clause in the engagement letter limiting the client from distributing the audit report to parties other than those agreed on an identified in the engagement letter.