Justify the importance of engagement letters and their contents

The engagement letter will be sent before the audit. It specifies the nature of the contract between the audit firm and the client and minimizes the risk of any misunderstanding of the auditor's role.The terms of the audit engagement shall be agreed with management and recorded in an audit engagement letter.The engagement letter is the written terms of an engagement in the form of a letter.Form and content of the audit engagement letter.The audit engagement letter shall include the following:

· The objective and scope of the audit

· The auditor's responsibilities

· Management's responsibilities

· Identification of the applicable financial reporting framework for the preparation of the financial statements

· Reference to the expected form and content of any reports to be issued by the auditor and a statement that there may be circumstances in which a report may differ from its expected form and content

Additional matters that may be included:

The audit engagement letter may also make reference to the following:

· Elaboration of scope of audit, including reference to legislation, regulations, ISAs, ethical andother pronouncements

· Form of any other communication of results of the engagement

· The fact that due to the inherent limitations of an audit and those of internal control, there is anunavoidable risk that some material misstatements may not be detected, even though the auditis properly planned and performed in accordance with ISAs

· Arrangements regarding planning and performance, including audit team composition

· Expectation that management will provide written representations

· Agreement of management to provide draft financial statements and other information in time toallow auditor to complete the audit in accordance with proposed timetable

· Agreement of management to inform auditor of facts that may affect the financial statements, ofwhich management may become aware from the date of the auditor's report to the date of issue ofthe financial statements

· Fees and billing arrangements

· Request for management to acknowledge receipt of the letter and agree to the terms outlined in it

· Involvement of other auditors and experts

· Involvement of internal auditors and other staff

· Arrangements to be made with predecessor auditor

· Any restriction of auditor's liability

· Reference to any further agreements between auditor and entity

· Any obligations to provide audit working papers to other parties

• Agreements concerning the involvement of auditors experts and internal auditors
• Restrictions to the auditor's liability.

A change in the terms of audit engagement prior to completion may result from:

(a) A change in circumstances affecting the need for the service

(b) A misunderstanding as to the nature of an audit or of the related service originally requested(c) A restriction on the scope of the audit engagement, whether imposed by management or causedby circumstances