A successful audit engagement relies on a good relationship between the auditor and client. A great relationship is built on mutual respect, cooperation and responsiveness. Auditors and clients are expected to work together on a variety of financial reporting decisions, which may sometimes result in disagreement. The resolution of these disagreements through auditor-client negotiations is a key part of the audit process. Prior research on auditor-client negotiation has examined behavioral experiments, surveys and developed analytical models (e.g., Trotman & Wright 2005).
The agreement between auditor and client is often a complex issue as it can impact both the quality of the audit and the auditor-client relationship. For example, the agreement can affect how openly and honestly both parties communicate during an audit. It can also impact how quickly issues are resolved and whether a positive audit opinion is issued.
Having an effective audit engagement letter helps both the auditor and the client set expectations before starting an audit. This helps the audit run more efficiently and avoids misunderstandings during the process. In addition, the contract can also detail the responsibilities of both parties, include a list of the services included in the engagement, and provide other terms and conditions.
A good audit engagement letter should also state the auditor’s responsibilities to maintain independence and confidentiality in the course of an audit. In addition, it should outline the methods of determining the audit fees and billing arrangements. It should also mention the audit firm’s responsibility to protect confidential information and comply with data protection regulations.