[140]
Engagement letters
(Issued March 1995)
Contents
Paragraphs
Introduction
1–5
Procedures
6–13
Principal contents
14–17
Compliance with International Standards on Auditing
18
Effective date
19
Appendix – Example of an audit engagement letter
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Engagement letters
Statements of Auditing Standards (‘SASs’) are to be read in the light of ‘The scope and
authority of APB pronouncements’. In particular, they contain basic principles and
essential procedures (‘Auditing Standards’), indicated by paragraphs in bold type,
with which auditors are required to comply in the conduct of any audit. SASs also
include explanatory and other material which is designed to assist auditors in
interpreting and applying Auditing Standards. The definitions in the Glossary of terms
are to be applied in the interpretation of SASs.
Introduction
The purpose of this SAS is to establish standards and provide guidance to auditors
on:
1
(a) agreeing with clients the terms of engagements by means of audit engagement
letters; and
(b) the contents of audit engagement letters.
The auditors and the client should agree on the terms of the engagement, which
should be recorded in writing. (SAS 140.1)
2
For the purpose of this SAS ‘client’ means the addressees of the auditors’ report, or,
when as will often be the case it is not practical to agree such terms with this body,
the entity itself through the board of directors or the audit committee.
3
The terms of the engagement are normally recorded in an engagement letter and
their acceptance by the client evidenced by signature by a person at an appropriate
level within the entity, for example the finance director or equivalent, although other
forms of contract may be used. In the public sector due account is to be taken of the
relevant legislative requirements on the appointment of auditors and the arrangements under which an engagement is defined.
4
This SAS is intended to assist auditors in the preparation of engagement letters
relating to audits of financial statements. While the principles of the guidance may
also be helpful in relation to other audit-related services, such as reporting on
interim statements or Cadbury Code compliance statements, it is not intended to
cover matters that may be relevant to such engagements. When these and other
services such as tax, accounting, or management advisory services are to be provided, auditors often prepare separate engagement letters so as to distinguish clearly
the statutory audit from other services. In particular, the provision of investment
business advice as defined by the Financial Services Act 1986 usually requires the
preparation of a separate engagement letter. The distinction between the statutory
audit and other services is particularly important because auditors are not able to
limit their liability in respect of the statutory audit.
5
Procedures
Auditors should agree the terms of their engagement with new clients in writing.
Thereafter auditors should regularly review the terms of engagement and if
appropriate agree any updating in writing. (SAS 140.2)
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6
APB Statements of Auditing Standards
7
The agreement of an engagement letter is in the interests of both auditors and client.
It is therefore desirable that the contents be agreed prior to the audit appointment
(and the letter sent soon after) and, in any event, before the commencement of the
first audit assignment. Subsequently, the regular review of the engagement letter
helps the auditors and the client avoid misunderstandings with respect to the
engagement.
Recurring audits
8
As part of the annual planning process, auditors consider whether a new engagement letter is required. The following factors may make the agreement of a new
letter appropriate:
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any indication that the client misunderstands the objective and scope of the
audit;
a recent change of management, board of directors or audit committee;
a significant change in ownership, such as a new holding company;
a significant change in the nature or size of the client’s business; and
any relevant change in legal or professional requirements.
It may be appropriate to remind the client of the original letter when the auditors
decide a new engagement letter is unnecessary for any period.
Audit of components
9
When the auditors of a parent entity are also auditors of its subsidiary undertaking,
branch or division (component), a separate engagement letter may, in many cases,
be unnecessary. The factors which influence the decision whether or not to agree a
separate engagement letter with the component include:
●
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who appoints the auditors of the component;
whether a separate report is to be issued on the component;
whether the terms for each component are the same;
legal and regulatory requirements;
the extent of any work performed by other auditors; and
the degree of ownership by the parent.
If the auditors send one letter relating to the group as a whole, it identifies the
components for which they are appointed as auditors. The directors of the parent
entity are requested to forward the letter to the boards of directors of the components concerned. Each board is requested to confirm that the terms of the
engagement letter are accepted.
Changes in nature of engagement
10
Auditors who, before the completion of the audit, are requested to change the
engagement to one which provides a different level of assurance, should consider the
appropriateness of so doing. If auditors consider that it is appropriate to change the
terms of engagement, they should obtain written agreement to the revised terms.
(SAS 140.3)
11
A request by the client for the auditors to change the terms of engagement prior to
completion may result from:
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Engagement letters SAS 140
●
●
●
a change in circumstances affecting the need for the service;
a misunderstanding as to the nature of an audit or of the related service
originally requested; or
a restriction on the scope of the engagement, whether imposed by management
or caused by circumstances.
Any such request, and the reason given for it, require careful consideration by the
auditors, particularly of the implications of a restriction on the scope of the
engagement.
If auditors consider that it is not appropriate to change the terms of engagement,
they consider their position and may need to take legal advice, or, if appropriate,
consult a regulatory body. If auditors are unable to agree to a change of engagement
and are not permitted to continue the original engagement, they withdraw and
consider whether there is any obligation, contractual or otherwise, to report to other
parties, such as the board of directors or shareholders, the circumstances necessitating the withdrawal.
12
Auditors of limited companies in Great Britain who cease to hold office as auditors
are required to comply with the requirements of section 394 of the Companies Act
1985 regarding the statement to be made by them in relation to their ceasing to hold
office. Equivalent requirements for Northern Ireland are contained in Article 401A
of the Companies (Northern Ireland) Order 1986 and, for the Republic of Ireland,
are contained in section 185 of the Companies Act 1990.
13
Principal contents
Auditors should ensure that the engagement letter documents and confirms their
acceptance of the appointment, and includes a summary of the responsibilities of the
directors and of the auditors, the scope of the engagement and the form of any
reports. (SAS 140.4)
14
Matters normally dealt with relating to the principal relevant responsibilities of the
directors and of the auditors and to the scope of the audit are illustrated in the
example of an audit engagement letter in the Appendix, which is drafted in a form to
apply to limited company clients. In the case of other entities, the matters relating to
the responsibilities of directors and auditors are modified in accordance with the
requirements of relevant legislation or, in the case of non-statutory audits, the terms
agreed with the client.
15
Form of reports
The engagement letter normally refers to the form of reports or other communication of results of the engagement to be issued by the auditors in addition to the
statutory reports to the members, such as a report to the directors or management on
any identified material weaknesses in, or observations on, the accounting and
internal control system. The letter might also refer to matters such as the intended
confidentiality of such reports and, where appropriate, to the conditions, if any, on
which permission may be given to the directors to make those reports available to
others.
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16
APB Statements of Auditing Standards
Other matters
17
Other matters which may be dealt with in the engagement letter include:
●
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fees and billing arrangements;
procedures where the client has a complaint about the service;
where appropriate, arrangements concerning the involvement of:
– other auditors and experts in some aspect of the audit;
– internal auditors and other staff of the entity;
arrangements, if any, to be made with the predecessor auditors, in the case of an
initial audit;
any restriction of the auditors’ liabilities to the client (when such possibility
exists);
where appropriate, the country by whose laws the engagement is to be governed;
a reference to any further agreements between the auditors and the client;
and
a proposed timetable for the engagement.
Compliance with International Standards on Auditing
18
Compliance with this SAS ensures compliance in all material respects with International Standard on Auditing 210 ‘Terms of Audit Engagements’.
Effective date
19
Auditors are required to comply with the Auditing Standards contained in this SAS
in respect of audits of financial statements for periods ending on or after 23
December 1995.
Appendix – Example of an audit engagement letter
This form of letter has been drafted to apply to limited company clients. It is not
necessarily comprehensive or appropriate to be used in relation to every company,
and it must be tailored to specific circumstances – for example, to the special
reporting requirements of regulated entities, or of small companies to which certain
exemptions are given.
To the directors of . . .
The purpose of this letter is to set out the basis on which we (are to) act as auditors
of the company (and its subsidiary undertakings) and the respective areas of
responsibility of the directors and of ourselves.
Responsibilities of directors and auditors
1.1
As directors of the above company, you are responsible for ensuring that the
company maintains proper accounting records and for preparing financial statements which give a true and fair view and have been prepared in accordance with the
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Engagement letters SAS 140
Companies Act 1985 (or other relevant legislation – note 1). You are also responsible
for making available to us, as and when required, all the company’s accounting
records and all other relevant records and related information, including minutes of
all management and shareholders’ meetings.
We have a statutory responsibility to report to the members whether in our opinion
the financial statements give a true and fair view and whether they have been
properly prepared in accordance with the Companies Act 1985 (or other relevant
legislation). In arriving at our opinion, we are required to consider the following
matters, and to report on any in respect of which we are not satisfied (note 2):
1.2
(a) whether proper accounting records have been kept by the company (note 3) and
proper returns adequate for our audit have been received from branches not
visited by us;
(b) whether the company’s (note 3) balance sheet and profit and loss account are in
agreement with the accounting records and returns;
(c) whether we have obtained all the information and explanations which we
consider necessary for the purposes of our audit; and
(d) whether the information given in the directors’ report is consistent with the
financial statements.
In addition, there are certain other matters which, according to the circumstances,
may need to be dealt with in our report. For example, where the financial statements
do not give details of directors’ remuneration or of their transactions with the
company, the Companies Act 1985 requires us to disclose such matters in our
report.
We have a professional responsibility to report if the financial statements do not
comply in any material respect with applicable accounting standards, unless in our
opinion the non-compliance is justified in the circumstances. In determining whether
or not the departure is justified we consider:
1.3
(a) whether the departure is required in order for the financial statements to give a
true and fair view; and
(b) whether adequate disclosure has been made concerning the departure.
Our professional responsibilities also include:
●
●
1.4
including in our report a description of the directors’ responsibilities for the
financial statements where the financial statements or accompanying information do not include such a description; and
considering whether other information in documents containing audited financial statements is consistent with those financial statements.
Scope of audit
Our audit will be conducted in accordance with the Auditing Standards issued by the
Auditing Practices Board, and will include such tests of transactions and of the
existence, ownership and valuation of assets and liabilities as we consider necessary.
We shall obtain an understanding of the accounting and internal control systems in
order to assess their adequacy as a basis for the preparation of the financial
statements and to establish whether proper accounting records have been maintained by the company. We shall expect to obtain such appropriate evidence as we
consider sufficient to enable us to draw reasonable conclusions therefrom.
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2.1
APB Statements of Auditing Standards
2.2
The nature and extent of our procedures will vary according to our assessment of the
company’s accounting system and, where we wish to place reliance on it, the internal
control system, and may cover any aspect of the business’s operations that we
consider appropriate. Our audit is not designed to identify all significant weaknesses
in the company’s systems but, if such weaknesses come to our notice during the
course of our audit which we think should be brought to your attention, we shall
report them to you. Any such report may not be provided to third parties without
our prior written consent. Such consent will be granted only on the basis that such
reports are not prepared with the interests of anyone other than the company in
mind and that we accept no duty or responsibility to any other party as concerns the
reports.
2.3
As part of our normal audit procedures, we may request you to provide written
confirmation of certain oral representations which we have received from you during
the course of the audit on matters having a material effect on the financial statements. In connection with representations and the supply of information to us
generally, we draw your attention to section 389A of the Companies Act 1985 (note
4) under which it is an offence for an officer of the company to mislead the
auditors.
2.4
In order to assist us with the examination of your financial statements, we shall
request sight of all documents or statements, including the chairman’s statement,
operating and financial review and the directors’ report, which are due to be issued
with the financial statements. We are also entitled to attend all general meetings of
the company and to receive notice of all such meetings.
2.5
The responsibility for safeguarding the assets of the company and for the prevention
and detection of fraud, error and non-compliance with law or regulations rests with
yourselves. However, we shall endeavour to plan our audit so that we have a
reasonable expectation of detecting material misstatements in the financial statements or accounting records (including those resulting from fraud, error or
non-compliance with law or regulations), but our examination should not be relied
upon to disclose all such material misstatements or frauds, errors or instances of noncompliance as may exist.
2.6
(Where appropriate – note 5) We shall not be treated as having notice, for the
purposes of our audit responsibilities, of information provided to members of our
firm other than those engaged on the audit (for example information provided in
connection with accounting, taxation and other services).
2.7
Once we have issued our report we have no further direct responsibility in relation
to the financial statements for that financial year. However, we expect that you will
inform us of any material event occurring between the date of our report and that of
the Annual General Meeting which may affect the financial statements.
Other services
3
You have requested that we provide other services in respect of .......... The terms
under which we provide these other services are dealt with in a separate letter. We
will also agree in a separate letter of engagement the provision of any services
relating to investment business advice as defined by the Financial Services Act
1986.
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Engagement letters SAS 140
Fees
Our fees are computed on the basis of the time spent on your affairs by the partners
and our staff and on the levels of skill and responsibility involved. Unless otherwise
agreed, our fees will be billed at appropriate intervals during the course of the year
and will be due on presentation.
4
Applicable law
This [engagement letter] shall be governed by, and construed in accordance with,
[English] law. The Courts of [England] shall have exclusive jurisdiction in relation to
any claim, dispute or difference concerning the [engagement letter] and any matter
arising from it. Each party irrevocably waives any right it may have to object to an
action being brought in those Courts, to claim that the action has been brought in an
inconvenient forum, or to claim that those Courts do not have jurisdiction.
5
Agreement of terms
Once it has been agreed, this letter will remain effective, from one audit appointment to another, until it is replaced. We shall be grateful if you could confirm in
writing your agreement to these terms by signing and returning the enclosed copy of
this letter, or let us know if they are not in accordance with your understanding of
our terms of engagement.
6
Yours faithfully
We agree to the terms of this letter
..................................................................
Signed for and on behalf of (company)
Notes
Relevant legislation for the Republic of Ireland is the Companies Acts 1963 to 1990
and for Northern Ireland is the Companies (Northern Ireland) Order 1986.
1
In the Republic of Ireland, auditors are required to report additionally on matters (a)
to (d) as identified in section 1.2 of the example engagement letter, and on whether
there existed at the balance sheet date a financial situation which, under section 40(1)
of the Companies (Amendment) Act 1983, would require the convening of an
extraordinary general meeting of the company. Hence this sentence would read:
2
‘. . . we are required to consider the following matters and to report on:’
The reference to ‘company’ does not need to be altered in the case of groups as section
237 of the Companies Act 1985 refers only to the company being audited and not to
any parent company or subsidiary or associated undertaking.
3
Relevant references for the Republic of Ireland are sections 193(3), 196 and 197 of the
Companies Act 1990. The relevant reference for Northern Ireland is Article 397A of
the Companies (Northern Ireland) Order 1986.
4
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APB Statements of Auditing Standards
5
When accounting, taxation or other services are undertaken on behalf of an audit
client, information may be provided to members of the audit firm other than those
engaged on the audit. In such cases, it may be appropriate for the audit engagement
letter to include this or a similar paragraph to indicate that the auditors are not to be
treated as having notice, for the purposes of their audit responsibilities, of such
information, to make it clear that a company would not be absolved from informing
the auditors directly of a material matter.
6
Additional paragraph – Complaints procedures
Certain professional bodies require members to notify clients of their own complaints
procedures and of the clients’ right to make complaints to those professional bodies.
This might appropriately be included in the engagement letter in a form such as the
following:
‘We aim to provide you with a fully satisfactory service and [name] as
engagement partner will seek to ensure that this is so. If, however, you are unable
to deal with any difficulty through [him][her] and [his][her] team please contact
[name]. We undertake to look into any complaints promptly and to do what we
can to resolve the position. If you are still not satisfied you may of course take up
the matter with [professional body] by whom we are regulated for audit
purposes.’
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