Advanced Audit and Assurance (International) · Professional appointments

Engagement Letters and Terms of Engagement (ISA 210)

Updated 11 October 2026 · Fact-checked

An engagement letter records the agreed terms of an audit between the auditor and the client. ISA 210 requires the auditor to agree terms with management or those charged with governance before starting. To answer exam questions, list the contents, link each to the scenario, and flag when terms need revising.

Understand Engagement Letters and Terms of Engagement

An engagement letter is a written agreement between the audit firm and the client. It sets out the objective and scope of the audit, who is responsible for what, and the form of reporting. Its purpose is to avoid misunderstanding about the work.

ISA 210 says the auditor should agree the terms of engagement with management or those charged with governance, as appropriate, before accepting or starting the engagement. The agreed terms must be recorded in an engagement letter or other suitable written form. Agreement rests on a precondition: management accepts its responsibilities, and the financial reporting framework is acceptable.

The letter normally covers: the objective and scope of the audit; the auditor's responsibilities; management's responsibilities (preparing the financial statements under the applicable framework, internal control, and giving the auditor access to all information and people needed); the framework used; and the expected form and content of the auditor's report, noting that the report may differ from the expected form if conditions require. Many firms also include fees, timing, use of other auditors or experts, and limits on liability where permitted.

For recurring audits, the auditor assesses each year whether the terms need to be revised or the client reminded of existing terms. Revision is likely when there are signs the client misunderstands the objective and scope, any revised or special terms are needed, there is a recent change of senior management, a significant change in ownership or nature or size of the business, a change in legal or regulatory requirements, a change in the reporting framework, or a change in other reporting requirements.

The engagement letter is different from a written representation letter. The engagement letter is issued by the auditor at the start and records the agreed terms. The representation letter comes from management near the end and confirms responsibilities and supports audit evidence (ISA 580). Exams often test this difference.

Key rules to remember

Timing of agreement: Agree terms (ISA 210) → before accepting or starting the audit; Terms are agreed with management or those charged with governance, as appropriate, and recorded in writing.
Preconditions for an audit: Acceptable financial reporting framework + management accepts its responsibilities; Management's responsibilities cover preparing the financial statements, internal control, and giving access and information.
Typical letter contents: Objective and scope + auditor's responsibilities + management's responsibilities + framework + form of report; Add fees, timing, experts, other auditors and liability limits as relevant to the scenario.
Recurring audits: Each period: decide whether to revise terms or remind the client; Triggers include change in management, ownership, nature or size of business, law or framework.
Change to a lower assurance engagement: Needs reasonable justification before agreeing; If the client asks to change the engagement to one with lower assurance, the auditor considers if there is reasonable justification. If not, the auditor should not agree and, if unable to continue the audit, withdraws and considers reporting obligations.

How to solve Engagement Letters and Terms of Engagement questions

Use this method for any question on engagement letters, whether it asks for contents, a revision decision or a comparison with other letters.

1Read the requirement and identify whether it asks for contents, timing, revision or comparison.
2Recall the ISA 210 structure: preconditions, agreement, letter contents, recurring audits, and changes in terms.
3Scan the scenario for triggers: new management, ownership change, new framework, new law, client requests for reduced scope, or unusual terms.
4Link each point you make to a specific fact in the scenario, naming the client and the issue.
5Explain why it matters: avoiding misunderstanding, protecting the firm, supporting the reporting and liability position.
6Conclude with a clear recommendation, such as issue a revised letter, remind the client, or refuse the change and consider withdrawal.
7Show professional skills: be concise, prioritise the key points and give practical advice.

Quickest way: Contents plus trigger check

When to use it: Use when time is short and the question asks what the letter should include or whether it must be updated.

Write the five core headings: scope, auditor duties, management duties, framework, report form.
Add one scenario-specific term, such as a component auditor or expert.
For updates, scan for change in management, ownership, business, law, framework.
Give a one-line action: revise, remind or decline.

Common mistakes in Engagement Letters and Terms of Engagement

Confusing the engagement letter with the management representation letter.
Both are letters linked to the audit, and both mention responsibilities.
Fix: Remember: engagement letter is from the auditor, at the start, recording terms. Representation letter is from management, at the end, supporting evidence.
Saying the letter must be reissued every year.
Students overstate the rule.
Fix: State that for recurring audits the auditor decides whether terms need revising or the client reminding. Reissue only when circumstances warrant it.
Listing generic contents without applying them to the scenario.
Students memorise a list and write it out.
Fix: Tie each item to a scenario fact, such as a new framework or an overseas component, to earn application and professional skills marks.
Omitting management's responsibilities.
Students focus on what the auditor will do.
Fix: Always include preparation of the financial statements, internal control, and access to information and people.
Agreeing to a client's request to reduce the scope without challenge.
Students want to keep the client happy.
Fix: Say the auditor needs reasonable justification, considers legal and reporting consequences, and if scope is restricted may need to modify the opinion or withdraw.
Addressing the letter to the wrong party.
Students forget the governance structure.
Fix: Agree terms with management or those charged with governance, as appropriate to the entity's structure.

Worked examples

Example 1

Zephyr Co is a long-standing audit client. This year a new finance director has joined, and the company has changed its reporting framework to IFRS Accounting Standards from local GAAP. Explain whether the audit firm should revise the engagement letter.

Show the solution

Recall ISA 210: for recurring audits, the auditor considers whether terms need revising or the client reminding.
Identify triggers in the scenario: a change in senior management (new finance director) and a change in the financial reporting framework.
Explain why the framework change matters: the letter identifies the framework, and the auditor's report wording and management's responsibilities refer to it.
Explain why the management change matters: the new finance director may not understand the audit scope and the responsibilities of management.
Recommend action: issue a revised engagement letter referencing IFRS Accounting Standards and agree it with management or those charged with governance.

Answer: Yes. The change in framework and the change in senior management are both indicators that terms should be revised. The firm should issue a new engagement letter naming IFRS Accounting Standards, restating management's responsibilities, and agree it before work begins.

Example 2

Before the audit of Brix Ltd starts, the managing director asks you to leave out any reference to management's responsibility for internal control from the engagement letter, saying that the board does not want it in writing. Advise the audit manager.

Show the solution

Identify that ISA 210 makes management's acknowledgement of its responsibilities a precondition for an audit.
Note that responsibility for internal control needed to prepare financial statements free from material misstatement is one of those responsibilities.
Explain the risk: if management will not acknowledge responsibilities, the auditor cannot be sure the basis of the audit exists.
Recommend action: discuss with those charged with governance and explain that the terms are not optional.
State the outcome: if management still refuses, the auditor should not accept the engagement, or should withdraw if already appointed and permitted by law, and consider any reporting obligations.

Answer: The firm should not agree to omit the wording. Acknowledgement of management's responsibilities is a precondition for an audit. If management refuses after discussion, the firm should decline or withdraw, subject to law, and consider any reporting duties.

Exam tips

Always apply: name the client and the trigger, not just the ISA 210 list.
Keep the engagement letter and representation letter separate in your answer, and state who issues each and when.
When asked about revisions, give both the triggers and the action, which is revise or remind.
If a client asks for reduced scope, discuss justification, legal impact on the report and withdrawal.
Use short bullet points with a heading per point to earn professional skills marks.

Practice questions from Professional appointments

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 must an engagement letter contain under ISA 210?

It should cover the objective and scope of the audit, the auditor's responsibilities, management's responsibilities, the financial reporting framework, and the expected form and content of the report. Firms often add fees, timing and other practical terms.

When should an engagement letter be updated?

For recurring audits, the auditor considers each period whether to revise terms or remind the client. Common triggers are a change in senior management, ownership, the nature or size of the business, the law or the reporting framework.

What is the difference between an engagement letter and a management representation letter?

The engagement letter is issued by the auditor at the start and records the agreed terms of the audit. The representation letter is provided by management near the end of the audit and confirms management's responsibilities and certain matters as audit evidence.

Who signs the engagement letter?

The auditor sends it and management or those charged with governance, as appropriate, agree to its terms. Agreement is normally shown by signing and returning a copy.