Final answer:
The arrangements between an auditor and an entity are formalized in an engagement letter, which is a critical document that outlines the audit's scope, responsibilities, timing, and audit service fees.
Step-by-step explanation:
The arrangements reached between the auditor and the entity are formalized in an engagement letter. This document serves as a contractual agreement detailing the scope of the audit, the responsibilities of both the auditor and the entity, the timetable for completion, and the fees for the audit services provided.
The engagement letter is critical as it provides clear expectations and understanding, helping to avoid misunderstandings and ensure both parties are aware of their obligations. It typically includes the objective and scope of the audit, the auditor's responsibilities, the management's responsibilities, the financial reporting framework being used, and the expected form and content of any reports to be issued by the auditor.