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Do you know the ABC's of engagement letters?

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.

C. To help protect a CPA from legal liability. In today's litigious environment, it is important that there is no misunderstanding about the work to be performed by a CPA, the level of assurance (if any) to be provided, the client's responsibility for the financial statements, fees, payment terms, etc.

Practice Management Self-Test Score Sheet

The new edition of the "AICPA Audit and Accounting Manual" suggests these key ingredients for engagement letters. How many are in your engagement letters?

* Identification of the client

* Records retention policy

* Description of the services to be provided

* Responses to subpoenas and outside inquiries

* Staffing of the engagement

* Explanation of how fees and costs will be billed

* Description of client responsibilities

* Payment terms

* Designation of client contacts

* Consequences of non-payment

* Timing of the work

* Alternative dispute resolution

* Consequences of extending completion deadlines

* Withdrawal and termination

* Requests for additional services

* Client signature

* Client communications required by the AICPA

* Provisions to resolve potential ethical conflicts

* Any matter or terms unique to an engagement that are agreed upon in advance of rendering services

Chuck Landes

AICPA Director, Audit and Attest
COPYRIGHT 2003 American Institute of CPA's
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2003, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Author:Landes, Chuck
Publication:Journal of Accountancy
Date:Oct 1, 2003
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