Question

(Auditing Principles & Procedures)

List the information that must be mentioned in an engagement letter? What is Engagement risk?

Answer 1

The Information that must be mentioned in an engagement letter:

1.The objective of the audit of the financial statements.

2. Management responsibility for the financial statements.

3. The responsibility of the auditor.

4. The applicable financial reporting framework

5. Any form or report and their content, if any to be issued.

6. The unavoidable risk that some material misstatements may go undetected due to the inherent limitations in an audit.

7. Arrangements regarding planning and performance of the audit.

8. Expectation regarding written represemtation from mangement.

9. The agreement that management will provide any information that may affect financial statements.

10. Restrictions to the auditor's liability.

Engagement Risk

Engagement risk is the overall risk associated with an audit engagement. There are three components of engagement risk:

Entity's business risk: It is associated with survival and profitability of the client.

Auditor's business risk: It is associated with litigation cost, loss of reputation and the risk of nonpayment.

Audit risk: It is associated with probability of giving an inappropriate opinion on the financial statement.