An engagement letter defines the legal relationship (or engagement) between a professional firm (e.g., law, investment banking, consulting, advisory or accountancy firm) and its client(s). This letter states the terms and conditions of the engagement, principally addressing the scope of the engagement and the terms of compensation for the firm.
Most engagement letters follow a standard format. The example given below refers to the engagement of an accountancy firm.
Standard format for letters of engagement
Addressee: Typically addressed to the senior management (e.g. CEO) of the client.
Identification of the service to be rendered: One type of service is a financial statement audit. Provided in this section is a brief description of the nature of the particular service. Other services that are planned for the audit (e.g. evaluation of internal control, preparation of regulatory reports) are also identified in this section.
Specification of the responsibilities of the auditor of the company: This section refers to the specific professional standards and responsibilities of the auditor.