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TS1: Using audit engagement letters
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TS1: Using audit engagement letters 
 
What do mandatory Australian Auditing Standards require? 
Mandatory ASA*210 Terms of Audit Engagements requires the auditor and the entity to agree the terms of the engagement. The auditor is to record these terms in writing and forward them to the entity. When the audit engagement is undertaken pursuant to legislation, the minimum applicable terms are those contained in the legislation. 
 
Why is an engagement letter important? 
Having an engagement letter – or some other form of written agreement – helps to avoid uncertainties and misunderstandings with respect to the engagement. It also clarifies the extent of your and your client’s responsibilities.  
For example, the trustees of a self managed superannuation fund may mistakenly believe that your audit of the fund also includes preparation of the financial report. Recording the engagement terms in writing helps to clarify any misunderstandings before the work commences, potentially aiding client relations and assisting with fee recovery. 
Keeping a copy of the engagement letter on file also provides evidence that you carried out the audit in accordance with ASAs. 
 
What should an engagement letter include? 
ASA 210 suggests that an engagement letter will generally include matters such as:

  • The objective of the audit: for example, the objective of a self managed superannuation fund audit is to form an opinion as to whether the financial report is presented fairly in accordance with the stated accounting policies and whether the Trustee of the fund has complied with the requirements of the Superannuation Industry (Supervision) Act 1993 (SIS Act);
  • An outline of management’s responsibilities:for example, to prepare the financial report;
  • The form of any reports issued: for example, the report will be issued to meet the requirements of the SIS Act. 
    ASA 210.10 –.12 contains further suggestions for engagement letter contents, and the Appendix to ASA 210 contains an example engagement letter you may wish to use.
 
What action do you need to take? 
Prior to commencing each of your audits, you should ensure that you have an engagement letter (or other written document) in place, and that the contents are current. For example, if the entity’s business has changed or there is a change in ownership, the engagement letter may need to be revised. You should also consider whether the change to ASA standards (from previous AUSs) requires a revised engagement letter to be issued. 
If you do need to prepare or update an engagement letter, use the guidance in ASA 210 to assist you. This standard is currently available at www.auasb.gov.au and will be available in your Members’ Handbook following the December 2006 update.  
 
* Mandatory Auditing Standards (ASAs) apply to audits of financial reports and other financial information for financial reporting periods commencing on or after 1 July 2006. The superseded AUS standard contained similar requirements.