The correct answer is: It sets out the auditor's view of the audit scope and purpose - the client should signify his agreement by signing and returning a copy to the auditor.

An engagement letter sets out the auditor's view of the audit scope and purpose - the client should signify his agreement by signing and returning a copy to the auditor.

Under ISA 210 Agreeing the terms of audit engagements the engagement letter is the contract between the auditor and the client. It should lay down the audit scope and the responsibilities of both auditors and directors, therefore this contract needs to be agreed by both parties and signed as evidence of agreement.

It does not need to be sent every year and can therefore roll from one year to the next. The letter originates from the auditor and not the directors.