An engagement letter is an agreement between a client and an auditor or accountant that defines the scope of work to be done, the timeline for the audit and the professional fees to be charged. The purpose of an audit engagement letter is to prevent misunderstandings and disagreements between the two parties in the event that the engagement does not go as planned.

It serves as a way to reduce the possibility of a malpractice claim and is often a requirement by many malpractice insurance carriers for firms. This is because engagement letters allow for a clear documentation of the stipulations of the relationship between the auditor or accountant and the client, which can help reduce the likelihood of litigation over disputed fees or work.

In addition to being a liability reduction tool, an effective audit engagement letter can also serve as a communication tool between the parties involved in the relationship. A well-drafted engagement letter can clarify what services will be provided, how long the audit will take and any additional costs that are outside of the original contract. This can prevent misunderstandings and unnecessary delays in the completion of the audit.

A well-drafted engagement letter can also include a mediation or arbitration clause in the event that any disputes do arise during or after the audit. This can aid in resolving the issue without the need for formal litigation, saving both parties time and money. It can also reduce the likelihood of a malpractice claim, as the mediation or arbitration clause can act as a deterrent for any potential claims against the auditor or accountant for breach of fiduciary duty or negligence. what is an engagement letter in auditing