Audit Engagement Letter
- a22162
- Jan 24
- 6 min read
Audit Engagement Letter
An audit engagement letter is a formal document that outlines the terms and conditions of an audit between an auditor and a client. It's a crucial part of the audit process, as it helps to ensure that both parties understand their respective roles and responsibilities.
Key elements typically included in an audit engagement letter:
Objective and Scope of the Audit:
Clearly define the financial statements that will be audited (e.g., balance sheet, income statement, cash flow statement).
Specify the applicable financial reporting framework (e.g., International Financial Reporting Standards (IFRS)).
Outline the nature and extent of audit procedures to be performed.
Auditor's Responsibilities:
Express an opinion on whether the financial statements present fairly, in all material respects,
the financial position, financial performance, and cash flows of the entity in accordance with the applicable financial reporting framework.
Conduct the audit in accordance with Singapore Standards on Auditing (SSAs).
Obtain sufficient appropriate audit evidence to support the audit opinion.
Management's Responsibilities:
Prepare financial statements that give a true and fair view in accordance with the applicable financial reporting framework.
Establish and maintain effective internal controls over financial reporting.
Provide the auditor with all relevant information and access to all records and personnel.
Fees and Billing:
Outline the basis for fees (e.g., hourly rates, fixed fees).
Describe the billing process and payment terms.
Other Matters:
Confidentiality obligations.
Limitation of liability (if applicable).
Dispute resolution procedures.
Basis for Fees
The "basis for fees" in an audit engagement letter refers to how the auditor will calculate and charge for their services. There are several common methods:
Hourly Rates: This is the most common method, where the auditor charges for the time spent by each team member involved in the audit. Hourly rates vary depending on the experience and expertise of the individual.
Fixed Fees: In some cases, a fixed fee can be agreed upon for the entire audit engagement. This is often used when the scope of work is well-defined and the complexity of the audit is relatively low.
Contingent Fees: Contingent fees are generally prohibited in auditing as they can create a conflict of interest. However, there may be limited exceptions in certain situations.
The engagement letter should clearly specify the basis for fees and any other relevant billing arrangements, such as:
Billing frequency: Whether bills will be issued monthly, quarterly, or upon completion of the audit.
Payment terms: The expected timeframe for payment of invoices.
Expenses: Whether expenses incurred by the auditor, such as travel and accommodation, will be billed separately.
By clearly outlining the basis for fees in the engagement letter, both the auditor and the client can avoid any misunderstandings or disputes regarding payment.
Important Considerations:
Clarity: Ensure the language is clear and concise so that both the auditor and the client understand the fee arrangement.
Transparency: Be transparent about any potential additional costs that may arise during the audit.
Professionalism: Maintain a professional and ethical approach to fee setting.
Example of an Audit Engagement Letter (Singapore):
[Your Firm Letterhead]
[Date]
[Client Name]
[Client Address]
Subject: Audit Engagement Letter
Dear [Client Contact Person],
This letter confirms our engagement to audit the financial statements of [Client Name] for the year ended [Date]. The financial statements will comprise the [list of financial statements].
Objective and Scope of the Audit
Our objective is to express an opinion on whether the accompanying financial statements present fairly, in all material respects, the financial position of [Client Name] as of [Date] and the results of its operations and its cash flows for the year then ended, in accordance with Singapore Financial Reporting Standards (SFRS).
In conducting our audit, we will:
Obtain an understanding of the entity and its environment, including internal control.
Assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks.
Perform tests of controls to evaluate the effectiveness of the entity's internal control over financial reporting.
Perform substantive procedures to obtain sufficient appropriate audit evidence regarding the amounts and disclosures in the financial statements.
Auditor's Responsibilities
Our responsibilities are to express an opinion on the financial statements based on our audit. We will conduct our audit in accordance with SSAs. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control.
We expect to issue a standard unqualified audit report on the financial statements. However, there may be circumstances in which we may be unable to issue an unqualified opinion.
Management's Responsibilities
Management is responsible for the preparation and fair presentation of the financial statements in accordance with SFRS and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
Fees and Billing
Our fees for this engagement will be based on [basis for fees]. We will provide you with regular updates on the progress of the audit and any significant issues that arise.
Sample Basis for Fees (Hourly Rates):
Our fees for this engagement will be based on the time spent by our personnel, billed at the following rates:
Partner: [Rate per hour]
Manager: [Rate per hour]
Senior Associate: [Rate per hour]
Associate: [Rate per hour]
We will provide you with regular updates on the progress of the audit and any significant issues that arise. We will also provide you with detailed time sheets upon request.
Sample Basis for Fees (Fixed Fee):
Our fee for this engagement is [Fixed Fee Amount]. This fee includes all work necessary to complete the audit, including:
[List specific tasks included in the fixed fee]
This fee does not include [List any expenses not included in the fixed fee, such as travel or out-of-pocket expenses].
Other Matters
We will maintain the confidentiality of all information obtained during the course of our audit, except as may be required by law or professional standards.
This letter constitutes our professional engagement to perform the audit services described above.
Please sign and return the attached copy of this letter to indicate your agreement with the terms and conditions set forth herein.
Sincerely,
[Your Firm Name]
[Authorized Representative]
How Bestar can Help
Bestar plays a crucial role in maintaining the integrity and reliability of financial information. Here's how we help:
Ensuring Accuracy and Reliability:
Independent Verification: Bestar provides an independent assessment of a company's financial statements, ensuring they are free from material misstatements, whether due to fraud or error.
Following Standards: We conduct audits in accordance with established standards (like Singapore Standards on Auditing - SSAs) and relevant accounting frameworks (like Singapore Financial Reporting Standards - SFRSs).
Promoting Trust and Confidence:
Investor Confidence: Audits build trust among investors, creditors, and other stakeholders by providing assurance that the financial information presented by a company is reliable and accurate. This fosters confidence in the capital markets.
Improved Decision-Making: Reliable financial information enables better decision-making for investors, lenders, and other stakeholders.
Detecting Fraud and Irregularities:
Fraud Detection: Bestar employs various techniques to detect potential fraud, such as analyzing transactions, reviewing internal controls, and interviewing employees.
Internal Control Evaluation: Bestar assesses the effectiveness of a company's internal controls, which are designed to prevent and detect fraud and errors.
Improving Business Processes:
Identifying Weaknesses: Audits often uncover weaknesses in a company's financial reporting and internal control systems.
Recommendations for Improvement: Bestar provides recommendations for improving these systems, which can lead to greater efficiency, reduced risks, and improved overall business performance.
Compliance with Laws and Regulations:
Regulatory Compliance: Audits help ensure that companies comply with relevant laws and regulations, such as tax laws and securities laws.
In essence, Bestar acts as independent gatekeepers, ensuring the integrity of financial information and promoting trust and confidence in the financial markets.
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