Company’s most recent fiscal year.
As part of management’s responsibility for the financial statements and the effectiveness of internal control over financial reporting, management is responsible for making available to us, on a timely basis, all of the Company’s financial records and relevant information
E X H I B I T 3 – 1
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A Sample Engagement Letter—EarthWear Clothiers (continued)
and company personnel to whom we may direct inquiries. Management is responsible for maintaining evidential matter, including docu- mentation of the design of controls to provide reasonable support for management’s assessment of the operating effectiveness of internal control over financial reporting.
As required by the standards of the PCAOB, we will make specific inquiries of management and others about the representations embodied in the financial statements and the internal control over financial reporting. Standards of the PCAOB also require that at the conclusion of the engagement we obtain a letter from management that confirms certain representations made during the audit of the financial statements and internal control over financial reporting. The results of our tests, the responses to our inquiries and the written representations comprise the evidential matter we intend to rely upon in forming our opinion on the financial statements and the effective- ness of the Company’s internal control over financial reporting. Similarly, the results of our analytical procedures, the responses to our inquiries, and the written representations obtained comprise the basis for our review on the unaudited quarterly financial information.
Document Retention The Company agrees to maintain documentation sufficient to support its assessment of internal control over financial reporting as of December 31, 2015, for a period of seven years from the date of our audit report.
Other Documents Standards established by the Public Company Accounting Oversight Board (United States) require that we read any annual report that con- tains our audit report. The purpose of this procedure is to consider whether other information in the annual report, including the manner of its presentation, is materially inconsistent with information appearing in the financial statements. We assume no obligation to perform procedures to corroborate such other information as part of our audit.
With regard to electronic filings, such as in connection with the SEC’s Electronic Data Gathering, Analysis, and Retrieval (“EDGAR”) system, you agree that, before filing any document in electronic format with the SEC with which we are associated, you will advise us of the proposed filing on a timely basis. We will provide you with a signed copy of our report(s) and consent(s). These manually signed documents will serve to authorize the use of our name prior to any electronic transmission by you. For our files, you will provide us with a complete copy of the document as accepted by EDGAR.
The Company may wish to include our report on these financial statements in a registration statement to be filed under the Securi- ties Act of 1933 or in some other securities offering. You agree that the aforementioned audit report, or reference to our Firm, will not be included in any such offering without our prior permission or consent. Any agreement to perform work in connection with an offering, including an agreement to provide permission or consent, will be a separate engagement.
Timing and Fees Completion of our work is subject to, among other things, (1) appropriate cooperation from the Company’s personnel, including timely preparation of necessary schedules; (2) timely responses to our inquiries; and (3) timely communication of all significant accounting and financial reporting matters. When and if for any reason the Company is unable to provide such schedules, information, and assistance, Willis & Adams and the Company will mutually revise the fee to reflect additional services, if any, required of us to complete the audit.
Our fee estimates are based on the time required by the individuals assigned to the engagement. Individual hourly rates vary according to the degree of responsibility involved and experience and skill required. We estimate our fees for this integrated audit of internal control and financial statements will be $2,250,000, exclusive of out-of-pocket expenses. This estimate takes into account the agreed-upon level of preparation and assistance from company personnel; we will advise management should this not be provided or should any other cir- cumstances arise which may cause actual time to exceed that estimate. Invoices rendered are due and payable upon receipt.
This engagement letter reflects the entire agreement between us relating to the services covered by this letter. It replaces and super- sedes any previous proposals, correspondence, and understandings, whether written or oral. The agreements of the Company and Willis & Adams contained in this engagement letter shall survive the completion or termination of this engagement.
If you have any questions, please contact us. If the services outlined herein are in accordance with your requirements and if the above terms are acceptable to you, please have one copy of this letter signed in the space provided below and return it to us.
Very truly yours,
Willis & Adams
M. J. Willis
M. J. Willis, Partner
APPROVED:
By Chad Simon
Chair, Audit Committee
Date April 3, 2015
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In addition to the items mentioned in the sample engagement letter in Exhibit 3–1, the engagement letter may include:
∙ Arrangements involving the use of specialists or internal auditors. ∙ Any limitation of the liability of the auditor or client, such as indemnification
to the auditor for liability arising from knowing misrepresentations to the auditor by management or alternative dispute resolution procedures. (Note that regulatory bodies, such as the SEC, may restrict or prohibit such liability-limiting arrangements.)
∙ Additional services to be provided relating to regulatory requirements. ∙ Arrangements regarding other services (e.g., assurance, tax, or consulting services).
Using the Work of the Internal Audit Function When the entity has an internal audit function (IAF), the auditor may use the work of the IAF as evidence and request the IAF provide direct assistance in conducting the audit. The auditor first needs to obtain an under- standing of the IAF, including information about the activities that it performs. The auditor next must determine whether any of these activities are relevant to the audit of the financial statements. If the auditor determines that the work of the IAF can be used for purposes of the audit, the auditor must evaluate:
∙ The extent to which the IAF’s organizational status and relevant policies and procedures support the objectivity of the internal auditors;
∙ The level of competence of the IAF; and ∙ The application by the IAF of a systematic and disciplined approach, including
quality control.
Table 3–2 presents factors that the auditor should consider when assessing the IAF. In Chapter 7, we discuss the effect the Sarbanes-Oxley Act has had on the use and assessment of the IAF for the audit of internal control over financial reporting.
The IAF’s work may affect the nature, timing, and extent of the audit procedures per- formed by the auditor. For example, as part of their regular work, the IAF may review, assess, and monitor the entity’s controls that are included in the accounting system. Similarly, part of the IAF work may include confirming accounts receivables or observing certain physi- cal inventories. If the IAF is reliable, the auditor may use the IAF’s work in these areas to reduce the scope of audit work. The materiality of the account balance and its related audit risk may also determine how much the auditor can rely on the IAF’s work. When internal auditors work directly for the auditor, the auditor should supervise, review, evaluate, and test their work.
The Role of the Audit Committee An audit committee is a subcommittee of the board of directors that is responsible for the financial reporting and disclosure process.1 For public
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1Some privately held companies may not have an audit committee. In those circumstances the auditor should com- municate with those charged with governance. Those charged with governance are persons with the responsibility for overseeing the strategic direction of the entity and obligations related to the accountability of the entity.
Practice I N S I G H T
The Securities and Exchange Commission has a long-standing view on matters of auditor indem- nification: when an accountant and an entity enter into an agreement of indemnity which seeks to provide the accountant immunity from liability for his or her own negligent acts, whether of omis- sion or commission, the accountant is not independent. Furthermore, inclusion of such a clause in an engagement letter that a registrant would release, indemnify, or hold harmless from any liability and costs resulting from knowing misrepresentations by management would also impair the firm’s independence (SEC, Financial Reporting Polices, Section 600-602.02.f.i. Indemnification by Client).
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companies, the auditor is required to establish an understanding of the terms of the audit engagement with the audit committee and to record that understanding in an engagement letter (AS16). Under Section 301 of the Sarbanes-Oxley Act, the audit committee of a public company has the following requirements:
∙ Each member of the audit committee must be a member of the board of directors and shall be independent.
∙ The audit committee is directly responsible for the appointment, compensation, and oversight of the work of any registered public accounting firm employed by the company.
∙ The audit committee must preapprove all audit and nonaudit services provided by its auditor.
∙ The audit committee must establish procedures for the receipt, retention, and treatment of complaints received by the company regarding accounting, internal control, and auditing.
∙ Each audit committee member must have the authority to engage independent counsel or other advisors, as it determines necessary to carry out its duties.
The audit committee should meet with the external auditor before the engagement starts to discuss the auditor’s responsibilities and significant accounting policies. It may also provide limited input into the scope of the auditor’s work, such as requesting that the external auditor visit certain locations. The audit committee may also engage the external or internal audi- tors to conduct special investigations. The external auditor is required to make a number of important communications to the audit committee during or at the end of the engagement. Chapter 17 covers them in detail.
The audit committee should also interact with the internal audit function. An ideal arrangement for establishing the independence of the internal audit function is for the head of internal auditing (chief audit executive) to report functionally to the audit committee and administratively to senior management (i.e., CEO and CFO).
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