ACCA Advanced Audit and Assurance (AAA) Practice Exam

What is the purpose of an engagement letter?

1. Define the audit team's roles

2. Outline the terms of the audit engagement

3. Summarize client financial performance

4. List potential ethical issues

The correct answer is: Outline the terms of the audit engagement

The purpose of an engagement letter is to outline the terms of the audit engagement. This document serves as a formal agreement between the auditor and the client, detailing the scope of the work to be performed, the responsibilities of both parties, and any specific expectations or limitations related to the audit. By clearly defining these terms, the engagement letter helps to prevent misunderstandings and establishes a mutual understanding of the goals and methods of the audit process. In addition to clarifying the scope, the engagement letter typically includes information about the timeline for the audit, the fee structure, and any applicable regulations or standards that will govern the audit. This comprehensive overview ensures that both the auditor and the client are aligned on the objectives and requirements of the engagement, which is crucial for a successful audit. While defining the audit team’s roles, summarizing client financial performance, and listing potential ethical issues may be considerations in the overall audit process, they do not capture the primary function of the engagement letter, which is focused on establishing the terms and expectations of the audit itself.