Audit Engagement Letter a. [CPA Firm s Letterhead]

Transcription

1 8 EBP 2/15 EBP-CL-1.1: Audit Engagement Letter a [CPA Firm s Letterhead] [Date] [Identify the body or individual(s) charged with governance.] and [Name of Management] b [Client s Name and Address] We are pleased to confirm our understanding of the services we are to provide for [Name of Plan] ( the Plan ) for the [period, year, OR years] ended [Date(s)] in connection with its annual reporting obligation under the Employee Retirement Income Security Act of 1974 (ERISA). We will audit the financial statements of [Name of Plan], which comprise the statement of net assets available for benefits [and of accumulated plan benefits] as of [Period or Year End(s)] and the related statement(s) of changes in net assets available for benefits [and of changes in accumulated plan benefits] for the [period, year, OR years] then ended, and the related notes to the financial statements (the financial statements), and report on the supplemental schedules of the Plan for the [period OR year] ended [Date]. c The following supplementary information accompanying the financial statements, as applicable, will be subjected to the auditing procedures applied in our audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, in accordance with auditing standards generally accepted in the United States of America, and we will report on whether the information is fairly stated in all material respects in relation to the financial statements as a whole [in a separate written report accompanying our auditor s report on the financial statements OR in a report combined with our auditor s report on the financial statements] : d, e 1. Assets (Held at End of Year) and Assets (Acquired and Disposed of Within Year). 2. Loans or Fixed Income Obligations in Default or Classified as Uncollectible. 3. Leases in Default or Classified as Uncollectible. 4. Reportable Transactions. 5. Nonexempt Transactions. 6. Delinquent Participant Contributions. These financial statements and supplemental schedules are required to be included in the Plan s Form 5500 filing with the Employee Benefits Security Administration (EBSA) of the Department of Labor (DOL). The supplemental schedules are presented for the purpose of additional analysis and are not a required part of the financial statements but are supplementary information required by the DOL s Rules and Regulations for Reporting and Disclosure under ERISA. Audit Objective The objective of our audit is the expression of an opinion about whether your financial statements are fairly presented, in all material respects, in conformity with U.S. generally accepted accounting principles, f and whether the supplemental schedules are fairly stated in all material respects in relation to the financial statements taken as a whole. Our audit will be conducted in accordance with auditing standards generally accepted in the United States of America and will include tests of your accounting records and other procedures we consider necessary to enable us to express such an opinion. g We will issue a written report upon completion of our audit of the Plan s financial statements. Our report will be addressed to [Identify parties, such as the Administrative Committee ] of [Name of Plan]. We cannot provide assurance that an unmodified opinion will be expressed. Circumstances may arise in which it is necessary for us to modify our opinion or add an emphasis-of-matter or other-matter paragraph. If our opinion is other than unmodified, we will discuss the reasons with you in advance. If, for any reason, we are unable EBP-CL-1.1

2 EBP 2/15 9 to complete the audit or are unable to form or have not formed an opinion, we may decline to express an opinion or withdraw from this engagement. h Audit Procedures Our procedures will include tests of documentary evidence supporting the transactions recorded in the accounts and direct confirmation of investments, [plan obligations], i [benefit obligations], i and certain other assets and liabilities by correspondence with financial institutions, [actuaries], i and other third parties. j We will also request written representations from your attorneys as part of the engagement, and they may bill you for responding to this inquiry. k At the conclusion of our audit, we will require certain written representations from you about the financial statements and related matters. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements; therefore, our audit will involve judgment about the number of transactions to be examined and the areas to be tested. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We will plan and perform the audittoobtainreasonable assurance about whether the financial statements are free of material misstatement, whether from (1) errors, (2) fraudulent financial reporting, (3) misappropriation of assets, or (4) violations of laws or governmental regulations, including prohibited transactions with parties in interest or other violations of ERISA rules and regulations, that are attributable to the Plan or to acts by management or employees acting on behalf of the Plan. Because of the inherent limitations of an audit, combined with the inherent limitations of internal control, and because we will not perform a detailed examination of all transactions, there is a risk that material misstatements may exist and not be detected by us, even though the audit is properly planned and performed in accordance with U.S. generally accepted auditing standards. In addition, an audit is not designed to detect immaterial misstatements or violations of laws or governmental regulations that do not have a direct and material effect on the financial statements. l However, we will inform the appropriate level of management of any material errors, fraudulent financial reporting, or misappropriation of assets that come to our attention. m We will also inform the appropriate level of management of any violations of laws or governmental regulations that come to our attention, unless clearly inconsequential n, o and will include prohibited transactions in the supplemental schedule of nonexempt transactions as required by the instructions to Form Our responsibility as auditors is limited to the period covered by our audit and does not extend to any later periods for which we are not engaged as auditors. p Our audit will include obtaining an understanding of the Plan and its environment, including internal control, sufficient to assess the risks of material misstatement of the financial statements and to design the nature, timing, and extent of further audit procedures. An audit is not designed to provide assurance on internal control or to identify deficiencies in internal control. However, during the audit, we will communicate to you and those charged with governance internal control related matters that are required to be communicated under professional standards. q We may from time to time, and depending on the circumstances, use third-party service providers in serving your account. We may share confidential information about you with these service providers, but remain committed to maintaining the confidentiality and security of your information. Accordingly, we maintain internal policies, procedures, and safeguards to protect the confidentiality of your personal information. In addition, we will secure confidentiality agreements with all service providers to maintain the confidentiality of your information and we will take reasonable precautions to determine that they have appropriate procedures in place to prevent the unauthorized release of your confidential information to others. In the event that we are unable to secure an appropriate confidentiality agreement, you will be asked to provide your consent prior to the sharing of your confidential information with the third-party service provider. Furthermore, we will remain responsible for the work provided by any such third-party service providers. r In addition, we will perform certain procedures directed at considering the Plan s compliance with applicable Internal Revenue Service (IRS) requirements for tax exempt status and ERISA plan qualification requirements. However, you should understand that our audit is not specifically designed for and should not be relied upon to disclose matters affecting plan qualifications or compliance with the ERISA and IRS requirements. If during the EBP-CL-1.1

3 10 EBP 2/15 audit we become aware of any instances of any such matters or ways in which management practices can be improved, we will communicate them to you. s Other Services t We will prepare the Plan s Form 5500, including required schedules, for the [period OR year] ended [Date] (as provided in a separate engagement letter) based on information provided by you. After we have completed the Plan s Form 5500 and required schedules, we will authorize the Plan to include our auditor s report on the financial statements and supplemental schedules with the Plan s Form 5500 filing. We will also [prepare OR assist in preparing] the financial statements of the Plan in conformity with U.S. generally accepted accounting principles based on information provided by you. We will perform the services in accordance with applicable professional standards, including the Statements on Standards for Tax Services issued by the American Institute of Certified Public Accountants. The other services are limited to the financial statement and Form 5500 services previously defined. We, in our sole professional judgment, reserve the right to refuse to perform any procedure or take any action that could be construed as assuming management responsibilities. We will advise management with regard to the preparation of the Form 5500, but management must make all decisions with regard to those matters. Management Responsibilities You are responsible for establishing and maintaining internal controls, including monitoring ongoing activities; for the selection and application of accounting principles; for establishing an accounting and financial reporting process for determining fair value measurements; [for the acceptance of the actuarial methods and assumptions used by the actuary] u ; and for the preparation and fair presentation of the financial statements in conformity with U.S. generally accepted accounting principles. f You are also responsible for making all financial records and related information available to us and for the accuracy and completeness of that information. You are also responsible for providing us with (1) access to all information of which you are aware that is relevant to the preparation and fair presentation of the financial statements, (2) additional information that we may request for the purpose of the audit, and (3) unrestricted access to persons within the Plan from whom we determine it necessary to obtain audit evidence. Your responsibilities include adjusting the financial statements to correct material misstatements and confirming to us in the written management representation letter that the effects of any uncorrected misstatements aggregated by us during the current engagement and pertaining to the latest period presented are immaterial, both individually and in the aggregate, to the financial statements taken as a whole. You are responsible for the design and implementation of programs and controls to prevent and detect fraud, and for informing us about all known or suspected fraud affecting the Plan involving (1) Plan management, (2) employees who have significant roles in internal control, and (3) others where the fraud could have a material effect on the financial statements. Your responsibilities include informing us of your knowledge of any allegations of fraud or suspected fraud affecting the Plan received in communications from employees, former employees, regulators, or others. In addition, you are responsible for identifying and ensuring that the Plan complies with applicable laws and regulations. You are also responsible for the fair presentation of the supplemental schedules and the form and content of the supplemental schedules in conformity with the DOL s Rules and Regulations for Reporting and Disclosure under ERISA. You agree to include our report on the supplementary information in any document that contains, and indicates that we have reported on, the supplementary information. You also agree to include the audited financial statements with any presentation of the supplementary information that includes our report thereon. v, w, x, y You agree to assume all management responsibilities for the actuarial services and any other nonattest services we provide; oversee the services by designating an individual, preferably from senior management, with suitable skill, knowledge, and/or experience; evaluate the adequacy and results of the services; and accept responsibility for them. z EBP-CL-1.1

4 EBP 2/15 11 Engagement Administration, Fees, and Other We understand that your personnel will prepare schedules, analyses, and all confirmations we request and will locate any invoices or other documents selected by us for testing. aa The audit documentation for this engagement is the property of [CPA Firm s Name] and constitutes confidential information. However, we may be requested to make certain audit documentation available to the U.S. Department of Labor pursuant to authority given to it by law. If requested, access to such audit documentation will be provided under the supervision of [CPA Firm s Name] personnel. Furthermore, upon request, we may provide copies of selected audit documentation to the U.S. Department of Labor. The U.S. Department of Labor may intend, or decide, to distribute the copies of information contained therein to others, including other governmental agencies. ab [Name of Engagement Partner] is the engagement partner and is responsible for supervising the engagement and signing the report or authorizing another individual to sign it. ac, ad We expect to begin our audit on approximately [Date] and to complete your Form 5500 and issue our report no later than [Date]. t, ae We estimate that our fees for the audit and other services other than the preparation of the Form 5500 will range from $ to $ and from $ to $ for the preparation of the Form You will also be billed for travel and other out-of-pocket costs such as report production, word processing, postage, etc. Additional expenses are estimated to be $. The fee estimate is based on anticipated cooperation from your personnel and the assumption that unexpected circumstances will not be encountered during the engagement. af If significant additional time is necessary, we will discuss it with you and arrive at a new fee estimate before we incur the additional costs. Our invoices for these fees will be rendered each month as work progresses and are payable on presentation. ag, ah, ai We appreciate the opportunity to be of service to the Plan and believe this letter accurately summarizes the significant terms of our engagement. If you have any questions, please let us know. If you agree with the terms of our engagement as described in this letter, please sign the enclosed copy and return it to us. Very truly yours, [CPA Firm s Signature] RESPONSE: This letter correctly sets forth the understanding of [Name of Plan]. aj Plan Administrator s Signature and Title Date: Governance Signature: Title: Date: Practical Considerations: a This letter should be used at the outset of each annual engagement to communicate and document the understanding with the client about the services to be performed. If a limited-scope audit is to be performed as EBP-CL-1.1

5 12 EBP 2/15 permitted by Regulation of the DOL s Rules and Regulations for Reporting and Disclosure under ERISA, use the letter at EBP-CL-1.2. Auditors occasionally find that management of a small plan does not understand some of the provisions of this agreement and may resist signing the letter. PPC s Guide to Audits of Nonpublic Companies, section 203, discusses steps auditors can take to overcome resistance. In addition, the authors believe that in most circumstances it is a best practice to obtain an engagement letter each year, rather than issuing a multi-year engagement letter. EBP-CL-1.4 presents a sample of a confirmation of terms of a multi-year engagement letter that may be used to remind management of the terms of the engagement. b Depending on the structure of the plan, the engagement letter may be addressed to management, those charged with governance, or both. The auditor is required to obtain management s agreement that it acknowledges and understands its responsibilities and is required to communicate with those charged with governance the auditor s responsibilities with regard to the audit and an overview of the planned scope and timing. To achieve those objectives, the authors recommend that the engagement letter be addressed to both management and those charged with governance. If the engagement letter is addressed only to those charged with governance or the administrative committee, change you and your throughout the letter to management or the Plan, as appropriate. The letter at EBP-CL-5.1 can be used instead of the engagement letter to communicate with those charged with governance during planning. However, regardless of whether the engagement letter or EBP-CL-5.1 is used for that purpose, the authors recommend also having a face-to-face discussion with those charged with governance during planning to encourage appropriate two-way communication. If the auditor communicates with a subgroup of those charged with governance, such as an administrative committee, the engagement letter may explicitly state that the auditor retains the right to communicate with the full governing body. c The appropriate titles of the financial statements to be audited should be specified as discussed in Chapter 3 of this Guide. Also, if the financial statements are presented on the modified cash basis of accounting, the phrase modified cash basis should be added to the titles. In a recurring audit engagement where comparative financial statements will be presented, the authors believe it is appropriate for the engagement letter to refer only to the period being audited (that is, the current period). Reference to prior periods may be necessary, however, when the auditor is engaged in the current period to audit both the current and one or more prior periods. d e Listanysupplementaryinformationonwhichyouhave been engaged to report that will accompany the basic financial statements. If there is no supplementary information, delete the reference to reporting on the supplemental schedules in the prior sentence. Also, delete this sentence and the following list. The report under AU-C 725, Supplementary Information in Relation to the Financial Statements as a Whole, which applies when the auditor is engaged to report on supplementary information, may be a separate report, but is typically an other-matter paragraph following the opinion paragraph of the report on the financial statements. AU-C 720, Other Information in Documents Containing Audited Financial Statements, requires you to communicate your responsibility with respect to such other information to those charged with governance during planning. If the engagement letter is used to communicate with those charged with governance during planning (rather than by using the letter at EBP-CL-5.1) and you are aware that other information will be included in a document containing the audited financial statements and your report thereon, include the following: A statement that your responsibility for other information included in documents containing the Plan s audited financial statements and auditor s report does not extend beyond the financial information identified in the report. A statement that you have no responsibility for determining whether such other information contained in these documents is properly stated. Additional information should be communicated at or near the conclusion of the audit, as illustrated at EBP-CL-5.2 and EBP-CL-5.3. f If the financial statements are prepared in conformity with a special purpose framework, replace U.S. generally accepted accounting principles with a description of the special purpose framework used to EBP-CL-1.1

6 EBP 2/15 13 prepare the financial statements. For example the modified cash basis of accounting. If the financial statements are prepared in conformity with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board, modify this paragraph to refer to IFRS. g The auditor might be engaged to conduct an audit using both U.S. GAAS established by the AICPA s Auditing Standards Board and the auditing standards established by the PCAOB. In that case, this sentence can be replaced by the following sentences: Our audit will be conducted in accordance with generally accepted auditing standards established by the Auditing Standards Board (United States) and in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States) and will include tests of your accounting records and other procedures we consider necessary to enable us to express such an opinion. We will not perform an audit of internal control over financial reporting. This Guide was developed to help firms that audit plans under auditing standards established by the AICPA. h This sentence is recommended by the authors to mitigate the firm s exposure to a breach of contract claim, should it withdraw from the engagement prior to completion, disclaim an opinion, or decline to issue a report. For example, if a significant risk of material misstatement due to fraud exists, and the auditor is not satisfied with the integrity of management and the diligence and cooperation from management in investigating the circumstances and taking appropriate action to mitigate or resolve such risks, the auditor may consider withdrawing from the engagement. Auditors may want to replace this sentence with the following language to further clarify the auditor s right to withdraw from the engagement: If circumstances occur related to the condition of your records, the availability of sufficient, appropriate audit evidence, or the existence of a significant risk of material misstatement of the financial statements caused by error, fraudulent financial reporting, or misappropriation of assets, which in our professional judgment prevent us from completing the audit or forming an opinion on the financial statements, we retain the right to take any course of action permitted by professional standards, including declining to express an opinion or issue a report, or withdrawing from the engagement. i j Omit these bracketed words if the plan is a defined contribution retirement plan or health and welfare benefit plan that does not involve an actuarial determination. Use the phrase plan obligations if the plan is a defined benefit retirement plan. Use the phrase benefit obligations if the plan is a defined benefit health and welfare plan. AU-C and AU-C state that the auditor should communicate with those charged with governance the planned use of the work of the internal audit function and the nature and extent of any planned use of internal audit personnel to provide direct assistance on the audit. Prior to using the internal auditors to provide direct assistance, AU-C requires the external auditor to obtain written acknowledgement from management or those charged with governance, as appropriate, that the internal auditors will be allowed to follow the external auditor s instructions and that the entity will not intervene in their work. If the engagement letter is used to communicate with those charged with governance during planning (rather than by using the letter at EBP-CL-5.1), that communication and acknowledgment should be made in this letter. The following may be used to communicate the planned use of the work of internal audit: We plan to use the work of [Describe the internal audit function.] of [Client s Name] to assist us in obtaining audit evidence [Describe the planned use of internal audit s work.]. The following may be used to communicate the planned use of internal audit personnel to provide direct assistance and to obtain the required acknowledgment from management or those charged with governance: We plan to use personnel from [Describe the internal audit function.] of [Client s Name] to provide direct assistance to us during the audit in [Describe the planned use of internal audit personnel for direct assistance.]. You acknowledge that those personnel will be allowed to follow our instructions and you will not intervene in their work. EBP-CL-1.1

7 14 EBP 2/15 In 2014, the AICPA issued SAS No. 128, Using the Work of Internal Auditors, which supersedes the existing guidance related to consideration of the internal audit function in an audit of financial statements in AU-C 610. The SAS is effective for audits of financial statements for periods ending on or after December 15, This Guide has been updated for SAS No k l This sentence is optional. It is added to avoid negative reactions from clients in the event they are billed by an attorney for responding to a legal representation letter. Legal representation letters are discussed in section 601. Some CPA firms like to mention to their clients that extended procedures designed to detect fraud can be performed at the client s option, but those procedures would be beyond the scope of the audit. The following wording can be used in those situations: We have advised you of the limitations of our audit regarding the detection of fraud and the possible effect on the financial statements (including misappropriation of cash or other assets). We have offered to perform, as a separate engagement, extended procedures specifically designed to detectfraudandyouhavedeclinedtoengageustodosoatthistime. m n If there is evidence that fraud may exist, the auditor is required to bring it to the attention of the appropriate level of management, even if the matter is considered inconsequential. If the fraud involves senior management (regardless of materiality) or is material to the financial statements, the auditor is required to report it directly to the audit committee or others charged with governance (such as the plan administrator, board of trustees or administrative committee). AU-C 240.A69 indicates that auditors also may consider it appropriate to reach an understanding with those charged with governance about the nature and extent of communication about misappropriations committed by lower-level employees. Absent such an agreement, the authors recommend reporting all fraud matters both to the appropriate level of management and to the plan administrator or others charged with governance. Professional standards do not require the auditor to address these communications in the engagement letter. Some firms omit these sentences because they believe they may increase a firm s legal liability. They believe the auditor may be left in a position of proving why a fraudulent act or a violation of law or regulation did not come to his or her attention. o See the discussion of communicating violations of laws and regulations in section 611. p Section 204 of PPC s Guide to Audits of Nonpublic Companies and Chapter 10 of PPC s Guide to Managing an Accounting Practice discuss other clauses auditors might use to limit their exposure to legal liability and other losses. Examples of clauses related to the following matters are included (see also practical consideration ae): Notification of report reproduction. Loss limitations and indemnifications. Time limitations. Undertaking to be truthful. Statute of limitations. Collection of fees relating to client litigation when the auditor is not a party. Reliance on oral advice or the absence of advice. Obtaining a retainer. EBP-CL-1.1

8 EBP 2/15 15 Compensation for employees hired by clients. Alternative dispute resolution. q r s t Communicating internal control related matters identified in an audit is discussed in section 611. See EBP-CL-4.1, EBP-CL-4.2, and EBP-CL-4.3 for illustrative letters that can be used to communicate internal control related matters. If management is interested, the auditor might furnish a sample of the letters before conducting the audit. ET Section requires that clients be informed, preferably in writing, if the audit firm will outsource professional services to third-party service providers (see section 401). If a third-party service provider is not used to perform professional services, this paragraph can be omitted. If the plan is subject to federal income taxes, revise this paragraph to omit references to the IRS and the IRS requirements. The auditor needs to be aware that evidence of a tax determination letter alone does not ensure that the plan is exempt from federal income taxes. Recent tax laws and regulations have imposed new requirements for tax qualification, including complex rules for nondiscrimination, number of plan participants, and minimum plan coverage. In addition, plans are often amended without receiving a new tax determination letter. In the case of health and welfare plans, the IRS does not issue tax determination letters to the plans, but the related trusts may receive them. See the discussion in section 601 for further information on plan tax status. The auditor should list other services, including nonattest services, to be provided. Before performing nonattest services, ET requires the auditor to establish and document in writing the understanding with the client regarding the objective of the nonattest engagement, the service to be performed, the practitioner s responsibility, the client s acceptance of its responsibilities, and any limitations of the nonattest engagement. Those items can be documented in the engagement letter or in EBP-CX-1.2. (If the engagement letter incorporates the understanding requirements of ET 1.295, make reference to the letter at the applicable steps in EBP-CX-1.2.) As previously stated, the auditor is required to document both the service to be performed and the objective of the engagement. However, in some cases, the authors believe that, depending upon the nature of the nonattest services, listing the service to be performed will also be stating the objectives. For example, in this letter, stating that the auditor will prepare (or assist in preparing) the financial statements in accordance with GAAP helps satisfy the requirement to document the objective of the engagement and the service to be performed. EBP-CX-1.2 provides additional space to document the understanding with the plan about the objectives of each nonattest service to be provided, the auditor s responsibilities, and any limitations of the engagement. The client s acceptance of its responsibility is included in the last paragraph of the Management Responsibilities section of this engagement letter (see practical consideration z). It is recommended that separate fee estimates be stated for each additional service to be rendered. Alternatively, a separate engagement letter may be used for the other services. See also practical consideration w. Revise the language in this section, as appropriate, for the specific services being provided. If the auditor will not prepare the Form 5500, these paragraphs should be appropriately revised and the last indicated paragraph replaced with the following: [Name of Engagement Partner] is the engagement partner and is responsible for supervising the engagement and signing the report or authorizing another individual to sign it. We expect to begin our audit on approximately [Date] and to issue our report no later than [Date]. As you have instructed, our engagement does not include preparation of the Plan s Form The AICPA s Audit and Accounting Guide, Employee Benefit Plans, requires that, before an auditor s report on the Plan s financial statements can be included with a filed Form 5500 (including any related schedules), the auditor must review the Form 5500 and consider whether there are any material inconsistencies between the other information in the form and the audited financial statements (including the required supplemental schedules) or any material misstatement of fact. We will, therefore, not issue our auditor s report until the completed Form 5500 has been provided for our review. EBP-CL-1.1

9 16 EBP 2/15 The last sentence can be replaced with the following if the auditor prefers: We will generally not issue our auditor s report until the completed Form 5500 has been provided for our review. If, however, our auditor s report is issued before the completed Form 5500 is provided for our review, our report should not be included with a Form 5500 filing without our approval. An illustrated letter has been provided at EBP-CL-12.4 for transmitting audit reports to the plan when the auditor has not reviewed Form Some auditors find the use of an optional letter such as this to be helpful. A discussion of the auditor s review of the Form 5500 is provided in section 610. u v Omit the bracketed words referring to actuarial methods and assumptions if the plan is a defined contribution retirement plan or health and welfare benefit plan that does not involve an actuarial determination. If the plan is a defined benefit retirement plan or a defined benefit health and welfare plan, use the bracketed words, financial status, instead of the words net assets available for benefits. Some plans may publish their financial statements and the related auditor s report on an electronic site, such as the plan s or the plan sponsor s website. AU-C 720.A4 clarifies that, for GAAS purposes, information contained on an entity s website is not considered to be other information and, accordingly, is not subject to the requirements of AU-C 720. Thus, auditors are not responsible for reading information in electronic sites containing audited financial statements or for considering the consistency of other information in those sites with the original document. Because of the potential security issues surrounding audited financial statements published electronically, and to avoid any misconceptions clients may have about the auditor s responsibility for those statements, auditors may want to consider adding a clause such as the following to their engagement letter when a client publishes financial statements electronically: With regard to the electronic dissemination of audited financial statements, including financial statements published electronically on your Internet website, you understand that electronic sites are a means of distributing information and, therefore, we are not required to read the information contained in these sites or to consider the consistency of other information in the electronic site with the original document. w Auditors may want to add an additional paragraph, such as the following, to address the confidentiality privilege related to certain written or oral tax advice. See also practical consideration t. Certain communications involving tax advice are privileged and not subject to disclosure to the IRS. By disclosing the contents of those communications to anyone, or by turning over information about those communications to the government, you, your employees, or agents may be waiving this privilege. To protect this right to privileged communication, please consult with us or your attorney prior to disclosing any information about our tax advice. Should you decide that it is appropriate for us to disclose any potentially privileged communication, you agree to provide us with written, advance authority to make that disclosure. x To coordinate the auditor s report date, management representation letter date, and the subsequent events evaluation footnote disclosure date, the auditor may want to discuss the dating requirements with management in advance of starting the audit. Additionally, the auditor may include in the engagement letter a provision that management will not date the subsequent event note earlier than the date of their management representation letter (also the date of the auditor s report). (See sections 602, 605, and 610.) The following type of clause might be included in the letter: You are required to disclose the date through which subsequent events have been evaluated and whether that date is the date the financial statements were issued or were available to be issued. You agree that you will not date the subsequent event note earlier than the date of your management representation letter. y This letter assumes supplementary information will accompany the basic financial statements and the auditor has been engaged to report on that information in relation to the financial statements as a whole. If you have EBP-CL-1.1

10 EBP 2/15 17 been engaged to report on supplementary information, AU-C requires you to obtain management s agreement that it acknowledges and understands its responsibility for the supplementary information. If there is no supplementary information, delete the preceding three sentences. z If the auditor performs nonattest services, such as actuarial services, preparation of the Form 5500, financial statement preparation, or other bookkeeping services, the auditor should comply with ET That guidance requires practitioners providing nonattest services to their attest clients to establish and document in writing an understanding with the client about the nonattest services. See practical consideration t. Part of that understanding is the client s acceptance of its responsibilities for the nonattest services. This paragraph should be modified to refer to all nonattest services provided. ET is discussed in section 401. If the auditor is not providing nonattest services, the guidance does not apply and this paragraph should be omitted. Some auditors may prefer to have the client specifically designate in the engagement letter the individual(s) responsible for overseeing the nonattest services. In that case, this sentence can be replaced by the following: You agree to assume all management responsibilities for the actuarial services, the Form 5500 preparation services, financial statement preparation services, and any other nonattest services we provide; oversee the services by designating an individual, [Name of Designated Individual, Preferably from Senior Management], with suitable skill, knowledge, and/or experience; evaluate the adequacy and results of the services; and accept responsibility for them. Activities such as financial statement preparation, cash-to-accrual conversions, and reconciliations are considered nonattest services effective for engagements covering periods beginning on or after December 15, This letter has been revised for those changes to ET aa The auditor may wish to attach to the engagement letter a list of schedules to be prepared by the client, for example, a copy of EBP-CL-12.5, Drafting Form for Client Information Request Letter. Some firms expand the paragraph about client assistance by including the following: We will schedule the engagement based in part on deadlines, working conditions, and the availability of your key personnel. We will plan the engagement based on the assumption that your personnel will cooperate and provide assistance by performing tasks such as preparing requested schedules, retrieving supporting documents, and preparing confirmations. If, for whatever reason, your personnel are unavailable to provide the necessary assistance in a timely manner, it may substantially increase the work we have to do to complete the engagement within the established deadlines, resulting in an increase in fees over our original fee estimate. If the client has insufficient personnel to assist with these items,it is advisable to include a fee provision for preparation of these items by the audit staff. Some firms add the following language noting that the firm will request written permission from the client before performing additional procedures necessitated by the client s failure to provide the agreed-upon level of assistance: We will not undertake any accounting services (including but not limited to reconciliation of accounts and preparation of requested schedules) without obtaining approval through a written change order for such additional work. If the services added are nonattest services, the auditor should follow the requirements of ET See practical considerations t and z. ab The auditor may be required by law, regulation, or audit contract, to provide access to and copies of audit documentation to a regulatory agency. The authors suggest this paragraph be included in all engagement letters. The regulatory agency requesting access to the workpapers of an employee benefit plan will most likely be the Employee Benefit Security Administration of the U.S. Department of Labor, however other agencies may be listed if applicable. See EBP-CL-16.1 for a draft letter the auditor should consider sending to the regulatory agency requesting access to the auditor s workpapers. EBP-CL-1.1

11 18 EBP 2/15 ac ad ae QC indicates that an audit firm should establish policies and procedures requiring that the identity and role of the engagement partner be communicated to management and those charged with governance. This sentence provides appropriate documentation that the communication has been made. ET addresses when a firm s independence from an attest client is considered impaired if a partner or employee leaves the firm and is employed by a client or considers potential employment with a client. Some firms choose to add language such as the following to aid the firm in maintaining independence in situations in which the client and firm personnel discuss employment: To ensure that [Firm Name] s independence is not impaired under the AICPA Code of Professional Conduct, you agree to inform the engagement partner before entering into any substantive employment discussions with any of our personnel. An auditor can attempt to have the statute of limitations for professional malpractice claims begin running at the end of a particular engagement by specifying the ending date or event in the engagement letter. For example, the following type of clause might be included in the letter: Our audit engagement ends on delivery of our audit report. Any follow-up services that might be required will be a separate, new engagement. The terms and conditions of that new engagement will be governed by a new, specific engagement letter for that service. af ag For example, these unexpected circumstances might include a greater than expected risk of material misstatement due to fraud. Additional time may also be necessary if the Plan changes service providers or modifies Plan documents. Section 402 of PPC s Guide to Managing an Accounting Practice discusses using the engagement letter as a collection tool and illustrates clauses relating to unexpected circumstances that might affect the fee estimate. Some auditors add language such as the following to address terms for payment of audit fees: In accordance with our firm policies, work may be suspended if your account becomes days or more overdue and will not be resumed until your account is paid in full. If we elect to terminate our services for nonpayment, our engagement will be deemed to have been completed upon written notification of termination, even if we have not completed our report. You will be obligated to compensate us for all time expended and to reimburse us for all out-of-pocket expenditures through the date of termination. Some auditors believe the first sentence of the preceding paragraph provides some protection against liability for breach of contract should they not complete the engagement because of nonpayment. Also, if the billing arrangements will be other than as stated in this paragraph, revise the paragraph as appropriate. ah Additional services may be added to an engagement after the engagement has begun. When clients request additional services, misunderstandings can be avoided by sending a letter to the client (1) detailing any agreed upon changes in fees and services and (2) indicating that, except as provided therein, the terms of the original engagement letter apply. If the scope of agreed upon services changes significantly, the auditor may consider issuing a separate engagement letter to cover the additional services. If significant other services, including nonattest services are added to an engagement, the authors recommend issuing a new engagement letter to cover the additional services. At a minimum, the new engagement letter or workpapers should include documentation of the understanding with the client regarding performance of any nonattest services in accordance with ET 1.295, as discussed in practical considerations t and z. (EBP-CX-1.2 provides a form auditors can use to meet the documentation requirements when additional other services are added after the engagement has begun.) The following paragraph can be used in an engagement letter to address the issue of requests for additional services: EBP-CL-1.1 You may request that we perform additional services not addressed in this engagement letter. If this occurs, we will communicate with you regarding the scope of the additional services and the estimated fees. We also may issue a separate engagement letter covering the additional services. In the absence of any other written communication from us documenting such additional services, our services will continue to be governed by the terms of this engagement letter.

12 EBP 2/15 19 ai When the Plan is paying the audit fees, rather than the sponsor, some auditors choose to add the following paragraph to clarify that the audit firm is not a fiduciary: Our relationship with you is limited to that described in this letter. As such, you understand and agree that we are acting solely as independent accountants. We are not acting in any way as a fiduciary or assuming any fiduciary responsibilities for you. We are not responsible for the preparation of any report to any governmental agency, or any other form, return, or report or for providing advice or any other service not specifically recited in this letter. aj Even though not specifically required by AU-C 210, the authors believe it is a best practice to require management to sign the engagement letter to document that they acknowledge and understand their responsibilities. If the auditor is engaged by management, then only management needs to sign the engagement letter, even if it is also provided to those charged with governance. In that case, providing the letter to those charged with governance is primarily to satisfy the responsibility to communicate planned scope and timing to them, which is not required to be in writing, so the governance signature is not necessary. An exception to that may be when the external auditor plans on using internal auditors to provide direct assistance. In that case, the external auditor is required to obtain written acknowledgement from management or those charged with governance, as appropriate, that the internal auditors will be allowed to follow the external auditor s instructions and that the plan will not intervene in their work. If the engagement letter is used to communicate with those charged with governance during planning (rather than by using the letter at EBP-CL-5.1), determine if those charged with governance also should sign this letter. (See practical consideration j.) If the auditor is engaged by those charged with governance, both management and those charged with governance need to sign the engagement letter. Those charged with governance would sign to evidence their agreement with the terms of the engagement, and management would sign to evidence their agreement with the terms of the engagement, and management would sign to acknowledge its responsibilities as set forth in the engagement letter. EBP-CL-1.1

13 20 EBP 2/15 EBP-CL-1.2: DOL Limited-scope Audit Engagement Letter a [CPA Firm s Letterhead] [Date] [Identify the body or individual(s) charged with governance.] and [Name of Management] b [Client s Name and Address] We are pleased to confirm our understanding of the services we are to provide for [Name of Plan] ( the Plan ) for the [period, year, OR years] ended [Date(s)] in connection with its annual reporting obligation under the Employee Retirement Income Security Act of 1974 (ERISA). Except as described below, we will audit the financial statements of [Name of Plan], which comprise the statement of net assets available for benefits [and of accumulated plan benefits] as of [Period or Year End(s)] and the related statement(s) of changes in net assets available for benefits [and of changes in accumulated plan benefits] for the [period, year, OR years] then ended, and the related notes to the financial statements (the financial statements) and report on the supplemental schedules of the Plan for the [period OR year] ended [Date]. c The following supplementary information accompanying the financial statements, as applicable, will be subjected to the auditing procedures applied in our audit of the financial statements and certain additional procedures: d, e 1. Assets (Held at End of Year) and Assets (Acquired and Disposed of Within Year). 2. Loans or Fixed Income Obligations in Default or Classified as Uncollectible. 3. Leases in Default or Classified as Uncollectible. 4. Reportable Transactions. 5. Nonexempt Transactions. 6. Delinquent Participant Contributions. These financial statements and supplemental schedules are required to be included in the Plan s Form 5500 filing with the Employee Benefits Security Administration (EBSA) of the Department of Labor (DOL). Audit Objective Our audit will be conducted in accordance with auditing standards generally accepted in the United States of America except that, as permitted by 29 CFR of the DOL s Rules and Regulations for Reporting and Disclosure under ERISA and as instructed by you, we will not perform any auditing procedures with respect to asset information prepared and certified to by [Name of Bank or Eligible Institution], the trustee, in accordance with 29 CFR , other than comparing the information with the related information included in the financial statements and supplemental schedules. f Under ERISA, the Plan administrator is generally responsible to the Plan participants for the financial information and the ability of the certifying entity to issue such ERISA certification. Because of the significance of the information that we will not audit, we will not express an opinion on the financial statements and supplemental schedules. g We will issue a written report upon completion of our audit of the Plan s financial statements. Our report will be addressed to [Identify parties, such as the Administrative Committee. ] of the Plan. We cannot provide assurance that a limited-scope disclaimer of opinion as permitted by Regulation of the DOL s Rules and Regulations for Reporting and Disclosure under ERISA will be expressed. Circumstances may arise in which it is necessary for us to make further modifications to our report, such as adding an emphasis-of-matter or other-matter paragraph. The form and content of the information included in the financial statements and supplemental schedules, other than that derived from the information certified to by the trustee, will be audited by us in accordance with auditing standards generally accepted in the United States of America, and will be subjected to tests of your accounting records and other procedures we consider necessary to enable us to EBP-CL-1.2