Engagement letter
In one sentenceA letter in which the auditor and the business agree in writing, before work starts, on the type and scope of the service, each party's responsibilities and the fees.
Simply put
The engagement letter prevents misunderstandings: it states whether a full audit or a limited review is required, that preparing the statements is management's responsibility, and what the auditor needs from management.
It is signed before work starts and updated if the service or its scope changes.
Example
A start-up company asks an audit firm to audit its statements for its first year. The firm sends an engagement letter stating that the service is an audit of the annual statements, the expected delivery date, the documents required and the fees, and the company signs it.
Don't confuse it with
Management representation letterThe engagement letter comes at the start of the work to set out the agreement, while the representation letter comes at the end, with management confirming what it has provided.