Compliance Management, Audit and Due Diligence · Audit Engagement

Audit Engagement Letter and Terms of Engagement under SA 210

Updated 11 October 2026 · Fact-checked

An audit engagement letter is the written agreement between auditor and client that records the terms of the audit. Under SA 210, it must state the objective and scope, auditor's and management's responsibilities, the financial reporting framework, and the expected form of reports. To answer questions, state the rule, apply it to the facts, then conclude.

Understand Audit Engagement Letter and Terms of Engagement

Before an auditor starts work, both sides must agree what the audit is, and what each party must do. SA 210 Agreeing the Terms of Audit Engagements deals with this. It protects the client from false expectations and protects the auditor from disputes later.

The standard speaks of preconditions: matters within the control of the entity, on which the auditor and management must agree. Ethical requirements such as independence and competence are within the auditor's control and are dealt with in SA 220. SA 300 links the two: at the start of each audit, the auditor performs the SA 220 procedures on client continuance, evaluates compliance with ethical requirements including independence, and establishes an understanding of the terms of engagement as required by SA 210.

The agreed terms must be recorded in an audit engagement letter or other suitable form of written agreement. The form and content can vary for each entity. The roles of management and those charged with governance in agreeing the terms depend on the governance structure of the entity and the relevant law or regulation.

On recurring audits, the auditor may decide not to send a new letter every period. But the auditor must assess whether the terms need revising or the entity needs a reminder of the existing terms. If the terms change during the engagement, the new terms must be agreed and recorded in writing.

Key rules to remember

Mandatory contents (SA 210, para 10): Letter must include: (a) objective and scope; (b) auditor's responsibilities; (c) management's responsibilities; (d) applicable financial reporting framework; (e) expected form and content of reports; Remember as five items. Item (e) also needs a statement that a report may differ from its expected form and content.
Recording of terms: Agreed terms = audit engagement letter or other suitable form of written agreement; Writing is required. A verbal understanding is not enough.
Recurring audits (para 13): Assess: (i) are revised terms needed? (ii) is a reminder of existing terms needed?; A fresh letter each year is not compulsory under the standard.
Change in terms (para 16): New terms agreed by auditor and management and recorded in writing; Applies to a letter or other written agreement.
Factors for revising or reminding (A29): Misunderstanding of audit scope; revised or special terms; change of senior management; significant change in ownership; significant change in nature or size of business; change in legal or regulatory requirements; change in reporting framework; change in other reporting requirements; Use these as a checklist in recurring audit questions.

How to solve Audit Engagement Letter and Terms of Engagement questions

Use the same pattern for any question on engagement letters, whether it asks for contents, a drafting exercise or a case on changed terms.

1Identify what is asked: preconditions, contents of the letter, recurring audit, or change in terms.
2State the rule from SA 210 in plain words, naming the paragraph only where you are sure of it.
3List the five mandatory contents if the question concerns the letter. Add relevant optional items such as fees, written representations and timetable.
4Pick out the facts: new client or existing, change of management, change in framework, a request to alter the engagement.
5Apply the rule to each fact. For a change request, ask whether there is a reasonable justification.
6Conclude clearly: what the auditor should do, and that the new terms must be recorded in writing.
7If drafting is asked, use headings: addressee, objective and scope, responsibilities, framework, reports, other terms, acknowledgement.

Quickest way: Five-item content check

When to use it: Use when time is short and the question asks what an engagement letter should contain.

Write the five mandatory items (a) to (e) as bullets.
Add three or four optional items from the standard: fees and billing, written representations, audit team arrangements, acknowledgement by management.
For recurring audits, write the A29 triggers in one line each.
Close with one sentence: terms must be in writing, and any change must also be in writing.

Common mistakes in Audit Engagement Letter and Terms of Engagement

Saying the engagement letter is optional or can be oral.
Students confuse practice with the rule.
Fix: State that agreed terms shall be recorded in an engagement letter or other suitable written agreement.
Saying a fresh letter must be sent every year.
Students assume annual reappointment means annual letter.
Fix: Say the auditor may decide not to send a new letter, but must assess whether terms need revising or a reminder.
Leaving out management's responsibilities or the reporting framework.
Students focus on the auditor's duties only.
Fix: Always list all five mandatory items, including management's responsibilities and the applicable framework.
Treating independence as an SA 210 precondition.
Both standards deal with acceptance, so they blur together.
Fix: Ethical requirements are in SA 220. SA 210 covers matters within the entity's control that the auditor and management must agree.
Accepting a client's request to downgrade an audit to a review without analysis.
Students think the client's wish settles the matter.
Fix: Test the reason. A change relating to incorrect, incomplete or unsatisfactory information is not reasonable, for example avoiding a qualified opinion or disclaimer.

Worked examples

Example 1

Sharma & Co has audited Veda Textiles Ltd for three years. In the current year, the company has appointed a new Managing Director, and the Companies (Accounting Standards) Rules framework has not changed. The partner proposes to send no letter this year. Advise whether this is acceptable.

Show the solution

Rule: on recurring audits, the auditor must assess whether circumstances require revision of terms and whether a reminder of existing terms is needed.
The auditor may decide not to send a new letter each period, so omitting one is not itself a breach.
Facts: a recent change of senior management is one of the factors listed in A29 that may make revision or a reminder appropriate.
Analysis: the partner must make the assessment and document the conclusion, not simply skip the letter.
Conclusion: the auditor should at least remind the new management of the existing terms, and revise them if anything else has changed.

Answer: Not sending a new letter is permitted, but the change of senior management calls for assessment. The auditor should remind the entity of the existing terms, or revise them if needed, and record this in writing.

Example 2

During the audit of Kaveri Traders Pvt Ltd, the auditor cannot get sufficient appropriate audit evidence on receivables. Management asks to change the engagement to a review engagement so that no qualified opinion or disclaimer is issued. Advise the auditor.

Show the solution

Rule: if the terms of the engagement are changed, the auditor and management must agree and record the new terms in writing.
The auditor must first consider whether there is reasonable justification for the change.
A change may not be reasonable if it relates to information that is incorrect, incomplete or otherwise unsatisfactory.
Facts: the request arises because the auditor cannot obtain evidence on receivables, and the aim is to avoid a qualified opinion or disclaimer. This matches the standard's own example of an unreasonable change.
Conclusion: the auditor should not agree on this basis.

Answer: The request is not reasonable. The reason is unsatisfactory evidence on receivables and a wish to avoid a modified opinion, so the auditor should not accept the change to a review engagement on this ground.

Exam tips

Write the five mandatory contents in a list. Examiners look for all five.
In case questions, tie each point to a stated fact, then conclude.
For drafting questions, give a clear structure: addressee, objective and scope, responsibilities, framework, reports, fees, acknowledgement.
Keep SA 210 and SA 220 separate: terms agreed with management versus ethical requirements within the auditor's control.
Cite paragraph numbers only when sure. Plain statements of the rule earn marks without risk.

Practice questions from Audit Engagement

Audit Engagement Letter 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.

Audit Engagement Letter and Terms of Engagement: frequently asked questions

What must an audit engagement letter contain under SA 210?

It must include the objective and scope of the audit, the auditor's responsibilities, management's responsibilities, the applicable financial reporting framework, and the expected form and content of reports. It must also say that a report may differ from its expected form and content.

Is a new engagement letter needed every year?

Not necessarily. On recurring audits, the auditor may decide not to send a new letter, but must assess whether terms need revision or a reminder. Changes such as new management, ownership or legal requirements may make this appropriate.

Can the engagement terms be changed after acceptance?

Yes, but the auditor must consider whether the change is reasonable. If agreed, the auditor and management must record the new terms in an engagement letter or other written agreement.

What is the link between SA 300 and SA 210?

SA 300 requires the auditor, at the start of the audit, to establish an understanding of the terms of engagement as required by SA 210. It also requires SA 220 procedures on client continuance and an evaluation of ethical compliance including independence.