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HMRC internal manual

Enquiry Manual

Examining Accounts: Accountants and Auditors: Letter of Engagement

The terms on which an accountant or auditor acts for a client are set out in the letter of engagement which will have been agreed formally with the client. The length and detail of the letter will depend upon the services to be provided. In some cases, it may just state that accounts will be prepared from information supplied, income tax computations prepared and agreed with HMRC and the personal return completed prior to signature by the client. The letter of engagement may record that in tax matters the accountant acts as agent for the client who remains responsible for the accuracy of returns.

When the client is a company with a far more substantial business and its own accounts department, the letter of engagement will have to be far more detailed covering the nature and requirements of the audit and the lines of demarcation between the accountant and the company’s accounts department. The letter is a useful summary therefore of the work which the accountant has contracted to undertake and the responsibilities of the company and its officers.

The letter might cover the items listed below.

  • The responsibilities of the directors to keep proper records, make these available to the auditors, and prepare financial statements which give a true and fair view and comply with the Companies Acts.
  • The responsibilities of the auditors under the Companies Acts and any other legislation.
  • The responsibilities of the auditors where financial statements do not comply with Statements of Standard Accounting Practice and Financial Reporting Standards in any material way.
  • The responsibilities of both parties for preventing and detecting fraud or other irregularities.
  • The Auditing Standards which will be applied to the audit and the work which will be done.
  • The assurances which may be sought from the directors for audit purposes.
  • The reports which the auditors will make to the directors where any significant weakness in the company’s accounting systems is identified. These reports are often known as management letters or letters of weakness.
  • What accounting records the company’s staff will maintain and what work they will do on them.
  • What further work the accountants will do to complete the accounts.
  • What taxation work the company’s staff will deal with and what the accountant will deal with (CT, IT, VAT, PAYE, benefits/ expenses, etc).
  • Fees payable.