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An engagement letter is a document that outlines the understanding between the auditor and the client before the audit begins. It is a legal contract that requires the client’s signature and typically includes the audit's objective and scope, responsibilities of both the auditor and management, inherent audit limitations, and fee details. The engagement letter prevents scope creep and potential liability issues by clarifying expectations regarding fees, services, and responsibilities, ensuring that all business arrangements are established upfront. Larger firms have quality procedures to ensure the engagement letter process is followed correctly.