Audit Engagement Letter (Philippines)

An Audit Engagement Letter in the Philippines communicates a formal position to the recipient and creates a written record that can be relied on later.

PSA 210 — the Philippine equivalent of International Standard on Auditing (ISA) 210 — requires the auditor to agree on the terms of the audit engagement with management or those charged with governance before beginning the audit, and to document the agreed terms in an engagement letter or other suitable form of written agreement. The engagement letter protects both the auditor and the client by clearly defining expectations and limiting the auditor's liability to the agreed scope of work.

CPA firms conducting external audits of Philippine corporations must hold accreditation from both the Securities and Exchange Commission (SEC) under SEC Memorandum Circular No. 4 (2012) on the Accreditation of External Auditors and Auditing Firms and the Professional Regulation Commission (PRC) Board of Accountancy (BOA) under Republic Act No. 9298 (Philippine Accountancy Act, 2004). SEC MC No. 4 (2012) classifies auditing firms into Group A (allowed to audit all SEC-registered corporations), Group B, and Group C based on the firm's quality control procedures and peer review history. Only Group A firms may audit publicly listed companies and other large corporations.

For companies regulated by the Bangko Sentral ng Pilipinas (BSP) — banks, quasi-banks, and trust entities — the external auditor must also be accredited by the BSP under BSP Circular No. 972 (2017) on the Accreditation of External Auditors for BSP-Supervised Financial Institutions.

The legal framework governing the Audit Engagement Letter (Philippines) in Philippines draws on several key statutes and regulatory bodies. Under Philippine law, the Civil Code of the Philippines (Republic Act No. 386) governs contractual obligations. The Revised Corporation Code (Republic Act No. 11232) regulates corporate entities through the Securities and Exchange Commission (SEC). The Labor Code of the Philippines (Presidential Decree No. 442) and Department of Labor and Employment (DOLE) govern employment matters. The Data Privacy Act of 2012 (Republic Act No. 10173) and the National Privacy Commission (NPC) protect personal data. The Bureau of Internal Revenue (BIR) administers tax obligations under the National Internal Revenue Code. Parties executing a Audit Engagement Letter (Philippines) in Philippines should confirm the document reflects current law, including any amendments enacted since the original drafting date. The National Internal Revenue Code (RA 8424) sets the foundational requirements.

An Audit Engagement Letter in the Philippines is needed at the start of every external audit engagement and whenever audit scope or terms are materially changed.

An Audit Engagement Letter is required before the annual audit of the financial statements of any corporation that is required to submit Audited Financial Statements (AFS) to the SEC under SEC Memorandum Circular No. 3 (2021) — typically corporations with paid-up capital of PHP 50,000 or more. The engagement letter must be executed before the auditor begins fieldwork, consistent with PSA 210 requirements.

An Audit Engagement Letter is needed when a new CPA firm is appointed as external auditor by the board of directors — the incoming firm must issue a new engagement letter clarifying the scope of the new engagement, consistent with the auditor rotation requirements under SEC Memorandum Circular No. 4 (2012) limiting individual partner audit rotations to 5 years for SEC-covered companies.

An Audit Engagement Letter is required for bank external audits under BSP Circular No. 972 (2017) — BSP-supervised financial institutions must appoint BSP-accredited external auditors and execute a formal engagement letter defining the audit scope consistent with BSP Circular No. 895 (2016) on the External Audit Requirements for BSP-Supervised Financial Institutions.

An Audit Engagement Letter is needed when the scope of an existing audit is expanded — for example, when a previously agreed scope limited to financial statement audit is expanded to include agreed-upon procedures, forensic review, or tax audit assistance — requiring a supplemental engagement letter or amendment to the original engagement terms.

An Audit Engagement Letter is required by grant-making bodies — the Commission on Audit (COA) for government-funded projects, international donor organizations, and development finance institutions — when they require independent audits of grant utilization, requiring the executing organization to engage a CPA firm under a formal engagement letter.

A PSA 210-compliant Audit Engagement Letter in the Philippines must contain the following essential elements.

Party Identification: Full legal names of the client company (with SEC Registration Number) and the auditing firm (with SEC accreditation number under MC No. 4, PRC-BOA accreditation number, and firm TIN). State the engagement partner's name and PRC CPA license number — the partner must be individually accredited with the SEC for the specific category of client being audited.

Audit Objective and Scope: A clear statement that the objective of the audit is to express an opinion on whether the financial statements present a true and fair view in accordance with Philippine Financial Reporting Standards (PFRS) or PFRS for SMEs, as appropriate. Define the financial statements to be audited — balance sheet, income statement, statement of changes in equity, cash flow statement, and notes — and the period covered (fiscal year end date).

Auditing Standards Reference: An explicit reference to Philippine Standards on Auditing (PSA) issued by the Auditing and Assurance Standards Council (AASC) of PICPA as the applicable auditing standards, consistent with PSA 210's requirement to define the applicable framework.

Management's Responsibilities: A description of management's responsibilities under PSA 210 — to prepare financial statements in accordance with PFRS; to maintain adequate internal controls; to provide the auditor with access to all information relevant to the audit; to provide written representations at the conclusion of the audit under PSA 580; and to prevent and detect fraud and error under PSA 240.

Auditor's Responsibilities and Limitations: A statement of the auditor's responsibilities — to conduct the audit in accordance with PSA to obtain reasonable assurance that the financial statements are free from material misstatement. Include the inherent limitations of an audit — an audit does not guarantee absolute accuracy or the detection of all fraud — to manage client expectations consistent with PSA 200.

Fees and Billing Terms: The audit fee in Philippine peso (PHP ₱), the billing schedule (retainer, milestone, or upon issuance of the audit report), and the treatment of out-of-pocket expenses. The fee is subject to VAT at 12% under Section 108 of the NIRC for VAT-registered CPA firms, and the client withholds expanded withholding tax (EWT) at 15% or 10% under BIR Revenue Regulations No. 2-98 for professional fees.

Reporting and Deliverables: The format of the auditor's report — Independent Auditor's Report in accordance with PSA 700/701/705/706 — the expected date of completion, and the number of copies to be delivered to the client for SEC and BIR submission purposes.

Additional compliance elements for a Audit Engagement Letter (Philippines) used in Philippines include: Under Philippine law, the Civil Code of the Philippines (Republic Act No. 386) governs contractual obligations. The Revised Corporation Code (Republic Act No. 11232) regulates corporate entities through the Securities and Exchange Commission (SEC). The Labor Code of the Philippines (Presidential Decree No. 442) and Department of Labor and Employment (DOLE) govern employment matters. The Data Privacy Act of 2012 (Republic Act No. 10173) and the National Privacy Commission (NPC) protect personal data. The Bureau of Internal Revenue (BIR) administers tax obligations under the National Internal Revenue Code. Forms-legal.com provides this template as a starting point for Philippines-compliant documentation.