Stephen Hu, CPA, from Taipei, Taiwan, has just accepted a new client, Kiwan Xou.

The
company will be audited under the ISA and IAS standards. The client will be given an audit
opinion and a management letter. The fees are based on hourly fees, the audit will take 125
hours, and will involve one senior (TD3,500 per hour), two staff auditors (TD2,800 per hour),
and a partner (TD5,000 per hour). Out-of-pocket expenses are estimated at TD65,000. The
payments will be 33 percent at the beginning of the audit with the balance at the end of the audit.
Required: Based on the above information, write an engagement letter to Kiwan Xou from
Steven Hu.
Answer:
To Kiwan Xou:
You have requested that we audit the financial statements of your company, which comprise the
balance sheet, income statement, statement of changes in equity, cash flow statements and the
related notes. We are pleased to confirm our acceptance and our understanding of this
engagement by means of this letter. Our audit will be conducted with the objective of our
expressing an opinion on the financial statements.
We will conduct our audit in accordance with International Standards on Auditing (ISA) and
International Accounting Standards (IAS) – were replaced in 2001 by International Financial
Reporting Standards (IFRS). ISA requires that we plan and perform the audit to obtain
reasonable, but not absolute, assurance about whether the financial statements are free from
material misstatements, whether due to fraud or error. An audit involves performing procedures
to obtain audit evidence about the amounts and disclosures in the financial statements. The audit
procedures selected depend on the auditor’s assessment of the risks of material misstatement of
the financial statements. An audit also includes evaluating the appropriateness of accounting
policies used and the reasonableness of significant estimates made by management, as well as
evaluating the overall financial statements presentation and disclosures. IAS (IFRS) is the set of
accounting rules issued by International Accounting Standards Board (IASB) that determine how
transactions and other accounting events are required to be reported in financial statements. They
are designed to maintain credibility and transparency in the financial world, which enables
investors and business operators to make informed financial decisions.
Because of the test nature and other inherent limitations of an audit, together with the inherent
limitations of any accounting and internal control system, there is an unavoidable risk that even
some material misstatements may remain undiscovered.
In making our risk assessments, we consider internal control relevant to the entity’s preparation
of the financial statements as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
entity’s internal control. However, we expect to provide you with a separate letter concerning
any material weaknesses in the design or implementation of internal control over financial
reporting that come to our attention during the audit of the financial statements that called
management letter.
We remind you that the responsibility for the preparation of financial statements that present
fairly the financial position, financial performance and cash flows of the company in accordance
with International Financial Reporting Standards (IFRS) is that of the management of the
company. Our auditors’ report will explain that management’s responsibility for the preparation
of the financial statements also includes:
 maintaining internal control relevant to the preparation of financial statements that are free
from misstatement, whether due to fraud or error;
 selecting and applying appropriate accounting policies that are consistent with International
Financial Reporting Standards (IFRS); and
 making accounting estimates that are appropriate in the circumstances.
As part of our audit process, we will request from management written confirmation concerning
representations made to us in connection with the audit.
We look forward to full co-operation from your staff and we trust that they will make available
to us whatever records, documentation and other information are requested in connection with
our audit.
For the fees, we will cost you on hourly basis. The audit will take 125 hours, and will involve
one senior, two staff auditors, and a partner. Here the following details:
Rate Hours Total
Senior TD3,500 125 TD437,500
Two Staff Auditors TD2,800 125 TD350,000
Partner TD5,000 125 TD625,000
Out-of-pocket expenses are estimated at TD65,000 and the payments will be 33 percent at the
beginning of the audit with the balance at the end of the audit.
Please sign and return the attached copy of this letter to indicate that it is in accordance with your
understanding of the arrangements for our audit of the financial statements.

SH, Auditors
Acknowledged on behalf of SH Company by

Stephen Hu, CPA

April, 29th 2020