Explain How Engagement Letters Can Be Used to Avoid Litigation

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The Answer is Engagement letters are of particular importance in non-audit engagements where misunderstandings may arise as to the nature of the public accountant's association with the financial statements. They are also important in engagements where there may be some misunderstandings as to the extent of an auditor's responsibilities, particularly as to the detection of fraud. ASA 210 /ISA 120 Agreeing the Terms of Audit Engagements requires the auditor to record in writing the terms of the audit engagement that are agreed to with the entity. Also, the auditor is required to forward a copy of the terms of the engagement to the entity. The written terms of the engagement should help the auditor minimise any potential risk of exposure which might arise as a result of any misunderstandings as to the auditor's responsibilities. Where relevant, the auditor should include in the engagement letter any arrangements concerning the involvement of other auditors, internal auditors or predecessor auditors and any restriction on the auditor's liability when such a possibility exists.

Explain How Engagement Letters Can Be Used to Avoid Litigation

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