Audit Engagement

Definition of Audit Engagement

Audit engagement refers to audit performed by an auditor. It is the very first stage of an audit procedure where the client is notified by the auditor that the work pertaining to audit has been accepted by him/her and also provides clarifications with regard to the scope and purpose of audit. To be more specific, audit engagement can be referred to the written letter that the auditor uses to notify the client that he/she would be engaging in auditing services. Thus, the audit engagement procedure is basically a negotiation based on professional terms that takes place between prospective customer and a public accounting entity. This procedure is used for finding new customers and offer accounting related services to different businesses.

The auditor uses the term ‘audit engagement’ when the entity has to undergo the auditing procedure. This could imply varied things and therefore it is necessary that the auditor clarifies what she/he exactly means by the term. Irrespective of the definition followed by the auditor, he/she makes it a point to follow certain specific guidelines and procedure for offering the services.

The term may also indicate all of the work performed by an auditor for a client under the terms of an engagement letter. In this case, an audit engagement spans the full range of audit procedures that may be used, including the examination of the client’s financial statements and the preparation of an audit report.

Full Engagement

Audit engagement consists of several steps that basically revolve around planning, substantiation, control testing and finalization. The very first step involves providing a letter to the client reminding him about the audit. Once the client has been contacts, both the auditor and client meet with each other to determine how, why and when the auditing would take place. In addition to this, the client also needs to provide the auditor with relevant resources for conducting the procedure smoothly. Following this, the auditor carries out surveys to find out more about the organization and its controls. This is followed by testing of controls and garnering of as much detail and information as is possible. On the basis of the results and information, the auditor prepares a temporary draft and shares the same with client. Once the client has gone through the draft report, he responds to the recommendations and findings made in it. After this, the auditor prepares a final audit report and may also request the client to fill a survey form to better understand his/her performance. The audit is completed after a follow up meeting with client, which usually happens within 6 months.

Audit Client Acceptance Letter

Auditors generally provide audit engagement letters as one of the final steps in the audit planning stage. The letter summarizes all the information the auditor has gained about the client, the client needs and audit objectives, as well as the scope of the audit and what the client is responsible for doing, suggest Practice Ignition, a company that produces management software for the accounting profession.

Additionally, audit engagement letters clearly indicate the auditor assigned to the audit. They also may indicate additional information the auditor will need during the audit, the auditor’s fees, people with whom the auditor will need to speak and how much time the auditor has to finish his work. Also sometimes included are relevant financial and accounting regulations to which the auditors must adhere.

A good audit engagement letter also recognizes that not all clients are familiar with audit procedures and therefore outlines those procedures for clarification. Audit engagement letters are very similar to work contracts in the way they are constructed in that they define duties and relationships, but based on their wording, they are not necessarily legally binding the way a formal contract is.

Pre-Engagement Activities in Auditing

Prior to actually beginning an audit, there are several important steps. First, the audit firm should decide whether or not to accept the client, or whether to continue to perform work on its behalf. If the client has been involved in unethical business conduct or has changed its business to a riskier industry, the renewal of an annual engagement is not an automatic process.

Provided the auditor is accepting the engagement, there should be a review of the permanent file and workpapers relating to any previous period to refresh staff on certain recurring issues relating to the client and to re-familiarize auditors with the client’s business.

Then the audit firm discusses the basics of the engagement with the client, including the timetable of fieldwork, the scope and duration of the audit, and expected delivery date of the audit opinion. These and other pertinent details such as the fee structure are documented in the engagement letter, which serves as the contract for professional services.

Audit Engagement Process

Once the auditor has been formally retained by the client, substantive audit planning can begin. A critical element of planning the audit is determining materiality. Materiality is a flexible concept that is the subject of much academic research and professional best practices, but it is basically a function of assets or income that would impact the decision-making of a user of financial statements.

The auditor should also conduct a thorough risk assessment, taking into account the industry of the client, the integrity of management, its corporate governance policies, and its system of internal controls. This assessment is the basis of selecting which audit procedures to perform and what specific fieldwork to conduct.