Do You Know the ABC's of Engagement Letters?

Article excerpt

Good engagement letters can be an essential ingredient in maintaining smooth client relations, insuring solid project planning, and, when all else fails, as effective tools in resolving differences and winning disputes.

The most important reason to use an engagement letter is to avoid misunderstandings with a client about the service or services to be performed and the disagreements that could possibly result if there was a misunderstanding. The engagement letter serves to document the contractual duties agreed to by a CPA, or his or her firm, and the client.

The engagement letter should be used:

A. To explain what responsibilities a CPA is and is not assuming. An engagement letter should be tailored for each individual engagement and it should include a detailed description of the services to be provided. For example, an audit engagement letter should indicate that because of the concept of reasonable assurance and because an audit does not involve examination of every transaction, material misstatements including those that occur as a result of fraud may go undetected.

B. To explain the client's responsibilities. Although a CPA may help maintain accounting records, suggest appropriate accounting principles, and assist in the preparation of a client's financial statements, the financial statements and the accounting records remain the responsibility of the client. This responsibility should be clearly understood and accepted at the beginning of an engagement. …