Audit engagement letter: key components, best practices, and a free template

Before you get into the numbers, there’s one thing that every audit needs: a clear agreement. 

The audit engagement letter lays the groundwork, defining what the audit covers, who’s responsible for what, and how the work will be carried out. It’s the first step toward a clear, well-managed engagement that sets expectations and protects both parties from day one. 

In this article, we’ll take a closer look at what belongs in a letter and how to write one that’s practical, protective, and easy to use — with a free template to help you get started.

What is an audit engagement letter?

An audit engagement is a professional agreement: the client agrees to be audited, and the auditor agrees to review the client’s financial statements. Independently and objectively.

But handshakes don’t hold up in audits. That agreement should be captured in the audit engagement letter. It’s the document that turns the verbal “yes” into a clear, written contract that lays out exactly what’s being audited, when the work will be done, and who’s responsible for what.

Beyond logistics, the letter plays a critical role in managing expectations. It creates mutual understanding, aligns with professional standards, and helps prevent misunderstandings during — or after — the audit.

What rules actually govern audit engagement letters?

Audit engagement letters exist for a reason — and that reason is regulation. Whether you’re working under international or U.S. standards, these letters are part of the formal audit process, not just documentation on the side.

Two core standards define the regulatory framework:

• ISA 210 (International): This standard applies globally and sets the expectation that auditors and clients agree to the terms of the engagement before any work begins. It supports consistency and accountability across jurisdictions — especially for firms working with international clients.
• AU-C Section 210 (U.S.): In the U.S., audits follow Generally Accepted Auditing Standards (GAAS), issued by the AICPA. Within that framework, AU-C Section 210 mirrors ISA 210’s intent but is tailored to U.S. requirements.

In some sectors, those baseline standards aren’t enough. Regulated industries like healthcare, government, and financial services may require additional language to address specific funder or compliance obligations.

While the frameworks may vary by region or sector, the intent is universal: to anchor every audit engagement in clarity, accountability, and shared understanding.

Who prepares and signs an engagement letter for an audit?

The responsibility for preparing the audit engagement letter sits squarely with the auditor. Whether it’s a solo practitioner or a larger firm, the auditor drafts the letter based on the planned scope of work, the applicable standards, and any industry-specific requirements.

But the engagement doesn’t officially begin until the client signs off. That signature must come from someone with the authority to commit the organization — typically a CEO, CFO, executive director, or board chair, depending on the entity. In legal terms, it needs to be an authorized signatory — someone empowered to represent the organization in contractual agreements.

The auditor signs as well, confirming acceptance of the terms and formalizing the professional relationship.

In some cases — especially for larger audits or regulated sectors — a legal representative may review the letter before it’s signed. This doesn’t replace the need for authorized signatories, but it does help ensure that the letter aligns with organizational policies or external legal obligations.

Bottom line: the auditor drafts it, but it doesn’t count until both sides — and the right people — put pen to paper.

Key components of an audit engagement letter

A strong engagement letter sets the tone for the entire audit. Below are the elements you’ll typically include.

1. Parties to the engagement

This section identifies who’s involved: the auditor (individual or firm) and the client (legal entity being audited). It should include official business names and, where relevant, specific departments or subsidiaries.

2. Objective and scope of the audit

Here’s where you spell out what the audit is intended to achieve and what it will cover. This includes the time period under review and the nature of the financial statements being audited. It sets the boundaries for the engagement — so both sides know what’s in scope and what isn’t.

3. Auditor’s responsibilities

This outlines what the auditor is committing to do, including conducting the audit in accordance with applicable standards, maintaining independence, and issuing an audit opinion. It also often includes a disclaimer that the audit is not designed to detect all fraud or error.

4. Audit limitations and scope exclusions

No audit covers everything. This section outlines the inherent limitations of audit procedures and clarifies any specific areas that are excluded from the engagement — such as internal audit reviews, regulatory compliance checks, or forensic procedures. It helps prevent unrealistic expectations or later disputes.

5. Management’s responsibilities

This part defines what the client is expected to provide — accurate financial statements, access to records, and cooperation during the audit. It also clarifies that management is responsible for the financial reporting framework and internal controls.

6. Applicable standards and reporting framework

This identifies the auditing standards the auditor will follow (such as ISA or AU-C) and the reporting framework used to prepare the financials (like IFRS or U.S. GAAP). It ensures both sides are aligned on the basis for evaluation.

7. Timeline, deadlines, and deliverables

This spells out key dates — when the audit will begin, when documents are due, and when final deliverables (like the audit report) will be issued. It’s especially helpful when coordinating with internal teams or year-end close processes.

8. Communication protocols

Set the ground rules for how communication will flow: who gets updates, how issues will be escalated, and what method (email, portal, in-person) will be used for sharing sensitive or time-sensitive information.

9. Fees, billing, and payment terms

This section should detail the agreed-upon fee structure (hourly, fixed, or value-based), invoicing schedule, and payment deadlines. It’s also smart to note any extra fees that might apply for out-of-scope work or delays.

10. Confidentiality and data protection

Audits involve sensitive financial data, and clients need to know it will be handled responsibly. This section confirms that all information shared will remain confidential and explains how data will be stored, shared, and protected.

11. Governing law and dispute resolution

If a legal issue arises, this clause defines which jurisdiction’s laws apply and how disputes will be resolved — whether through mediation, arbitration, or litigation. It adds a layer of legal clarity that’s often overlooked until it’s too late.

12. Right to terminate or withdraw

Either party may need to end the engagement under certain circumstances. This section outlines how termination works, including notice requirements and how fees will be handled if the audit ends early.

13. Acceptance and authorization

This is the final piece — the signatures. It confirms that both parties understand and accept the terms and that the individuals signing are authorized to commit their respective organizations.

Taken together, these elements fulfill the audit engagement letter purpose — to formally define the terms of the audit and serve as a reference point throughout the engagement.

Free audit engagement letter template

Looking for a ready-to-use starting point? Download our free audit engagement letter template and customize it for your next client engagement.

Download the template >>

For guidance beyond audits, check out our tips on how to write an accounting engagement letter or grab a bookkeeping engagement letter template.

Best practices for drafting an audit engagement letter

A well-written audit engagement letter isn’t just about compliance — it’s about setting the tone for a productive, risk-aware engagement. Whether you’re working with a long-time client or onboarding someone new, these best practices help ensure your letter is both clear and legally sound.

• Start with the essentials. Always include the basics: the parties involved, audit scope, timeline, applicable standards, and each side’s responsibilities. Missing just one of these opens the door to confusion later.
• Use consistent, plain language. Your client shouldn’t need a lawyer or an accounting dictionary to understand the terms. Clear phrasing reduces back-and-forth and helps non-technical stakeholders sign with confidence.
• Be specific about exclusions. If something isn’t part of the audit (like evaluating internal controls or compliance), spell that out. Vague language leads to misaligned expectations and scope creep.
• Tailor the letter to the client. Avoid one-size-fits-all language. A nonprofit, a multinational, and a startup may all need audits, but they won’t need the same terms. Reference any industry-specific requirements, special timelines, or reporting obligations relevant to the client.
• Revisit the letter annually. For returning clients, don’t reuse last year’s engagement letter without review. Even minor changes to scope, deadlines, or deliverables should trigger an updated version.

For a visual guide on crafting effective engagement letters, consider watching the following video:

How TaxDome can support your firm

An audit engagement letter is just one part of the puzzle. From onboarding new clients to delivering final reports, your firm needs a centralized system to keep everything organized, accessible, and secure. That’s where TaxDome comes in.

When it comes to your engagement letter workflow, TaxDome helps you:

• Automate letter delivery using e-signatures and custom templates
• Securely collect documents through a client portal that’s easy for clients to use and keeps your team on track
• Centralize communication with built-in messaging and task tracking

But that’s just the beginning. With TaxDome, you can manage your entire firm in one place — including onboarding, workflow automation, recurring billing, document management, internal collaboration, and client communication. Everything is fully customizable to match the way your firm works — whether you’re focused on tax, bookkeeping, advisory, or audit services.

Wrapping up

An effective audit engagement letter brings clarity, sets expectations, and minimizes risk. With a solid structure and the right tools to support your process, your firm can work more efficiently and confidently — from kickoff to final report. And when your workflows are aligned, every engagement runs more predictably and profitably.