Final answer:
The engagement letter serves as a formal agreement between an auditor and a client, detailing the scope, timeframe, financial statements under examination, and professional fees involved in the audit.
Step-by-step explanation:
Serving as a contract, the engagement letter outlines responsibilities and prevents misunderstandings between the auditor and client. This letter serves as a formal agreement that details the scope of the audit, the timeframe in which the audit will be conducted, the financial statements to be examined, and the professional fees involved. By clearly stating the auditor's and the client's responsibilities, the engagement letter helps ensure that both parties have a shared understanding of the terms and expectations associated with the audit process.