Change Country

Tax & Assurance Guidance

How to Make an Audit Agreement

Posted on August 16, 2016 by

Dave Van Damme

Dave Van Damme

Share This

After performing the task of selecting an auditor, there are several steps crucial to a smooth transition for both the business and new auditing team. By following these steps closely, a solid foundation can be created for a successful audit.

The Audit Contract

The first (and most important) step is to document the agreement between the company and auditor. This should be done in the form of an engagement letter or other written documentation signed by both parties – which is required by professional standards – and contains the following information:

  • Names and parties to the contract
  • Audit scope, objective, and purpose
  • Audit fee
  • Report format
  • Type and timing of support to be provided to the auditor by the entity
  • Professional auditing standards to be followed in performing the audit

Because this signed agreement represents a contract and is binding upon both parties, the company should consider seeking the advice of legal counsel on the agreement’s form and substance. Additionally, the engagement letter should make the following points about the auditor/entity relationship, identifying changes in the kind of work or amount required, and access to, and ownership of, audit products:

  • The auditor is an independent contractor.
  • At any time, by written notice, the entity may make changes or additions to work, or services, within the general scope of the engagement. If these changes are made, an equitable adjustment will be made in the fee of the audit using pre-specified rates.
  • If the auditor believes a change or addition to work is beyond the general scope of the agreement, the auditor must notify the entity in writing within a specified time, and before beginning this “out of scope” work.
  • The auditor is the owner of its audit documentation
  • A set time period for which the audit documentation must be retained by the auditor.
  • All reports provided to the entity by the auditor are the property of the entity and subject to its use and control, according to applicable laws and regulations.
  • If the auditor asks the entity to sign an engagement letter and there is (or will be) a separate contract, the entity should review the documents to ensure there are no inconsistencies between the two contracts.

Maintaining Accurate Records

After signing the engagement letter, the entity should ensure they are maintaining adequate support for their accounting records. This will allow the auditor to manage the transition process and help the audit go much more smoothly.

The auditor will request a plethora of documents, internal procedure descriptions, and account analyses. It’s a good practice to know where these items are located, and/or be prepared to have concise answers. The more prepared the entity is for these requests, the less time the auditor will spend on the engagement, which will result in lower fees.

Monitor the Audit / Communicate

The last crucial step to an effective transition and quality audit is to monitor the progress of the audit. This step is a role most audit committees hold; however, in many smaller businesses, an audit committee does not exist. As such, this responsibility can be delegated to certain managers or those charged with governance.

The best way to effectively monitor an audit is to require periodic progress reports and check-in with the auditor on a frequent basis. By holding these meetings, it allows the auditor to communicate any current issues, which can be addressed prior to audit completion. By taking this step, not only is the final audit product improved, but the working relationship between the company and auditor is strengthened.

If the engagement letter is not for a single audit report, it is also a good idea to continue this type of communication throughout the year to provide the auditor with any relevant changes or significant items that 
may affect future reporting.

Choosing an auditor is not an easy task and takes a lot of time and energy; however, if these steps are followed closely after selection, it will assist in a smooth transition process. Managing this process will enable the company to receive quality audit reports and a strong business partner.

Share This

Dave Van Damme

Shareholder, Advisory & Assurance

Leading the firm's advisory & assurance group, Dave supports closely held businesses with audits, financial reporting and fraud analysis.

Related Insights

Reduced Michigan Income Tax Rate for the 2023 Tax Year

Michigan’s state income tax rate will be reduced from 4.25% to 4.05% for the 2023 tax year. This temporary tax rate reduction will apply to all individuals and fiduciaries. The announcement was made by Michigan Treasurer Rachael Eubanks on March 29, 2023 following the release of the state’s fiscal year 2022 Annual Comprehensive Financial Report. 

by Margaret Amsden

Will Digital Advertising Services be Taxed by US States?

As e-commerce business continues to grow and evolve, the US tax landscape attempts to follow. However, taxation on digital activity is not always a clear or easy path. For example, in Maryland the constitutionality of its 1st in the nation tax on digital advertising gross revenue has been challenged. 

by Teresa Gordon

Tax Court Decision: IRS Lacks Authority to Assess Form 5471 Penalties

The Tax Court issued an opinion in Alon Farhy v. Commissioner, 160 T.C. 6 ( April 3, 2023), finding that the Internal Revenue Service lacked statutory authority to assess penalties under Internal Revenue Code §6038(b)(1) or (2) against a taxpayer who failed to file Form 5471

by Sue Tuson

The Sound of Automation Podcast

Industrial automation businesses are the driving force behind Industry 4.0, and Clayton & McKervey is here to help.

Skip to content