Audit and Assurance · Obtaining, accepting and continuing audit engagements

Engagement Letters and Terms of Engagement under ISA 210

Updated 11 October 2026 · Fact-checked

An engagement letter is a written agreement between auditor and client that sets out the terms of the audit. ISA 210 requires the auditor to agree terms with management or those charged with governance before starting. To answer exam questions, list the objective, scope, responsibilities, framework, reporting and fees, then apply them to the scenario.

Understand Engagement Letters and Terms of Engagement

Before an audit starts, the auditor and the client must agree what the audit will and will not do. The engagement letter records that agreement in writing. It is the contract's core document and the auditor's first line of defence against misunderstandings.

Why does it matter? Clients often believe the auditor will find all fraud, prepare the accounts or give advice. The letter corrects this expectation gap. It states that the auditor gives an opinion on the financial statements, that management prepares them, and that an audit gives reasonable, not absolute, assurance.

ISA 210 says the auditor should agree the terms with management or those charged with governance, and record them in an engagement letter or other suitable written form. The auditor should only accept the engagement if the preconditions for an audit are present. These are an acceptable financial reporting framework, and management's agreement that it acknowledges and understands its responsibilities.

There are three of those management responsibilities:

preparing financial statements in accordance with the framework and giving a true and fair view where relevant;
the internal control that management determines is necessary;
giving the auditor access to all relevant information, any additional information the auditor requests, and unrestricted access to people within the entity.

Written representations are a separate matter. They are dealt with under ISA 580 and are not part of this list of three responsibilities.

For a recurring audit, the auditor does not need a new letter every year. The auditor considers whether circumstances require the terms to be revised, and whether the client needs reminding of the existing terms. Typical triggers are a change in ownership, the nature or size of the business, legal requirements, the reporting framework or senior management.

Key rules to remember

Preconditions for an audit (ISA 210): Acceptable financial reporting framework + management's acknowledgement of its responsibilities; If either is missing, the auditor should not accept the engagement. The only exception is where the framework is unacceptable but law requires the engagement to be accepted. In that case, the auditor must not refer to the audit as conducted in accordance with ISAs in the report, and the engagement terms must state this. The auditor must also not describe the financial statements as giving a true and fair view unless the framework is acceptable. There is no such exception for management's acknowledgement of its responsibilities.
Engagement letter contents: Objective and scope; auditor's responsibilities; management's responsibilities; framework; form of reports; fees (and other terms); ISA 210 also expects reference to the expected form and content of reports and that the report may differ from expectations in some circumstances.
Management's responsibilities: Prepare statements + internal control + provide access to all relevant information, additional information requested and unrestricted access to people; Use this as a three-part checklist in any answer. The third part is about access to information and people. Written representations are a separate matter (ISA 580).
Recurring audits: Consider whether terms need revising or reminding; new letter not required each year; Look for changes in circumstances in the scenario.
Change in terms: Request must have a reasonable justification; otherwise do not agree; ISA 210 treats a change in circumstances affecting the need for the service, or a misunderstanding about the nature of the service, as reasonable justification. A move from an audit to a lower level of assurance is not justified merely because of restrictions imposed by management or inability to obtain evidence. Cost alone is unlikely to be a reasonable justification. Consider the work done to date.

How to solve Engagement Letters and Terms of Engagement questions

Use this method for any question on engagement letters, whether you are asked to list contents, explain why one is needed or deal with a client request to change terms.

1Read the requirement. Decide if it asks for contents, purpose, a new or recurring engagement, or a change in terms.
2Identify the key facts in the scenario: new client, change in ownership, regulation, scope restriction or a request to reduce the audit.
3If it asks for contents, group your points: objective and scope, auditor responsibilities, management responsibilities, framework, reports, fees.
4Link each point to the scenario. For example, if management seems unaware of its duty over fraud, stress that responsibility in the letter.
5For a change in terms, ask whether there is a reasonable justification. ISA 210 treats a change in circumstances affecting the need for the service, or a misunderstanding about the nature of the service, as valid. Restrictions imposed by management, or inability to obtain evidence, do not justify moving from an audit to a lower level of assurance. Cost alone is unlikely to be enough. Also consider the work already done.
6If the change is not justified and management will not allow the original audit to continue, consider withdrawing and reporting to the appropriate parties as required by law.
7Conclude with a clear recommendation: send a new letter, remind the client, or do not agree to the change.

Quickest way: The auditor, management, framework, reports, fees check

When to use it: Use this when you have little time, such as a 2-mark objective question or a short written requirement.

Write the five words: auditor duties, management duties, framework, reports, fees.
Add objective and scope if the question asks for full contents.
Add one scenario-specific point, such as a limitation on scope or a new director.
For changes in terms, ask one question: is there a reasonable justification?
If an objective test option says a letter is needed every year, or that it replaces the auditor's duties, reject it.

Common mistakes in Engagement Letters and Terms of Engagement

Saying the engagement letter is a legal requirement for every audit in every country.
Students confuse good practice with law.
Fix: State that ISA 210 requires agreed terms to be recorded in writing, and that the form may depend on local law.
Listing only auditor responsibilities and forgetting management's.
The audit feels like the auditor's job, so students focus on it.
Fix: Always give both sides. Management prepares the financial statements, maintains internal control and gives access to information.
Suggesting the auditor is responsible for preparing the financial statements or detecting all fraud.
Students mirror the client's misunderstanding.
Fix: State that the audit gives reasonable assurance and that management bears primary responsibility for fraud prevention and detection.
Recommending a new engagement letter every year regardless of circumstances.
Students assume more paperwork is safer.
Fix: Say the auditor considers whether terms need revision. Recurring audits may rely on the existing letter unless there are changes.
Agreeing to reduce an audit to a review because the client wants lower fees.
Students think the client's wishes decide the engagement.
Fix: Say that a change needs a reasonable justification. Cost alone is unlikely to be a reasonable justification. If the change is unjustified, the auditor should not agree to it.
Writing generic points with no link to the scenario.
Students memorise lists and do not apply them.
Fix: After each point, add a few words tying it to the facts given, such as the new finance director or a group structure.

Worked examples

Example 1

Your firm has been appointed auditor of Kestrel Co, a new client. The finance director believes the auditor will prepare the financial statements and detect any fraud. Explain why an engagement letter is needed and which points would address the finance director's beliefs. (6 marks)

Show the solution

Purpose: the letter records the agreed terms in writing, so both parties understand the audit before work begins and the risk of misunderstanding is reduced.
It helps address the expectation gap. The finance director's beliefs are exactly the type of misunderstanding the letter should correct.
Point 1: state that management is responsible for preparing the financial statements in line with the reporting framework.
Point 2: state that the auditor's responsibility is to express an opinion on the financial statements, not to prepare them.
Point 3: explain that the audit gives reasonable, not absolute, assurance, so it does not guarantee that all fraud will be found.
Point 4: state that management is responsible for internal control and for preventing and detecting fraud, and must give the auditor full access to information and people.
Add that the letter also protects the firm if a dispute arises later, since the terms are documented.

Answer: An engagement letter is needed to record agreed terms, avoid misunderstandings and narrow the expectation gap. It should state that management prepares the financial statements and maintains internal control, that the auditor expresses an opinion giving reasonable assurance, and that management must provide access to information. This directly addresses the finance director's mistaken views.

Example 2

Three months into the audit of Orbit Co, the managing director asks you to change the engagement to a review of the financial statements, because the audit is costing too much. Discuss how you should respond. (5 marks)

Show the solution

Identify the issue: a request to change to an engagement with a lower level of assurance.
Apply the rule: the auditor should not agree to a change without reasonable justification.
Assess the reason: cost alone is unlikely to be a reasonable justification. A valid reason would be a change in circumstances affecting the need for the service, or a misunderstanding about the nature of the service. A change is not justified merely because of restrictions imposed by management or inability to obtain evidence.
Consider why the request is made. Ask whether management wants to avoid scrutiny of a particular area, as this may signal a risk.
If the auditor cannot agree to the change and management will not allow the original audit to continue, the auditor should withdraw where possible and consider whether there is any duty to report the circumstances to others, such as the shareholders or a regulator.
If a change is agreed, consider the work done to date, agree new terms in writing and issue a new engagement letter. Make sure the report issued is appropriate to the revised engagement (ISA 210).

Answer: The firm should not agree to the change merely because of cost. It should discuss the reasons, consider whether the request hides a problem, and only agree if there is reasonable justification. If a change is agreed, the firm considers the work done to date, documents new terms in a revised letter and issues a report appropriate to the revised engagement. If it cannot agree to the change and management will not allow the audit to continue, the firm should withdraw and consider any reporting duties.

Exam tips

In a contents question, structure your answer using headings from the checklist and add scenario links to earn the application marks.
In objective tests, watch for options that say the letter removes management's responsibilities or is always required annually. Both are wrong.
For change-in-terms questions, always address justification first, then the consequences of agreeing or refusing.
Do not confuse the engagement letter with the letter of representation. The first sets terms before the audit. The second is management's written confirmation near the end.
Keep answers short and in point form. Each valid point with a reason usually earns the mark.

Engagement Letters and Terms of Engagement in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Engagement Letters and Terms of Engagement: frequently asked questions

What should be included in an audit engagement letter?

It should cover the objective and scope of the audit, the auditor's responsibilities, management's responsibilities, the financial reporting framework, the expected form of the reports and the fees arrangements. You can add points such as access to records or limits of the audit if the scenario suggests them.

Why is an engagement letter needed in an audit?

It documents the agreed terms so that the auditor and client share the same understanding. It reduces the expectation gap, clarifies who is responsible for what, and provides evidence of the agreement if there is a dispute.

Do you need a new engagement letter every year?

Not necessarily. For recurring audits, the auditor considers whether circumstances require the terms to be revised and whether to remind the client of the existing terms. Changes in ownership, management, legal requirements or the nature of the business may call for a new letter.

When can the terms of an engagement be changed?

They can be changed if there is reasonable justification, such as a change in circumstances affecting the need for the service or a misunderstanding of the nature of the service. A desire to reduce cost is unlikely to be enough, and restrictions imposed by management do not justify a move to a lower level of assurance. Any agreed change should be recorded in writing.