An audit engagement is the engagement of audit services, which means the process by which the customer engages an audit firm in Johor Bahru before they start performing any audit activity. In the audit engagement process, both parties will sign the engagement letter, which contains all the essential terms and conditions of their engagement. The terms consist of the audit scope, the audit objective (Also see The Audit Objective of External and Internal Audit), as well as the responsibilities of the auditors and the customer on the financial statements. Also, according to ISA200, the engagement letter should include vital information like the audit fees and the terms of payment.
Audit Standards Related to Audit Engagement
If an audit firm complies with the ISA, they should refer to ISA200 when they encounter any problems associated with the engagement letter. This standard defines things that the auditors need to complete before signing and accepting the audit works (Also see Introduction to Pre-audit).
For instance, the first thing they should do is to assess the nature of the business, backgrounds of the customer, as well as the sources of their capital. By doing so, they can be sure that the customer is running their business legally. Secondly, the auditors should examine if they have sufficient resources to conduct the audit for the company. The resources refer to the number of staff and their capability (Also see The Importance of Conducting Human Resource Audits). If not, the auditors should not accept the audit engagement.
Generally, after the audit managers engage the audit customer, they will draft the audit engagement first as they acquire the initial information from the customers. This indicates that both parties have agreed on most of the terms and conditions of the engagement. However, they still need to issue the official documents (Also see Introduction to Audit Documentation) so that they may check the details in the engagement letter if any argument arises in the future.
Information in an Audit Engagement Letter
There is some information that the auditors should include in the audit engagement letter, which includes:
- Audit scope
- Audit objectives
- Customer’s background, which includes its key management, location and the nature of the business
- Delivery of audit report (Also see What is an Unqualified Audit Report)
- Engagement fee, which is also known as audit fee
- The responsibilities of the auditor and the customer
- The rights of the auditor to access to the financial information and the relevant records
- The timeline of the fieldwork
- The type of financial framework which the customer is using