Wednesday, June 29, 2016

Audit Method: Client Acceptance Procedure

This first step in an audit engagement of client acceptance is very crucial where the practicing firm has to decide whether to accept the new client relationship or in case of existing client a periodic review whether to continue with the existing relationship. The decision to accept or continue an audit engagement depends on the client evaluation and ethical considerations.

As per paragraph 26 of ISQC-1, “The firm shall establish policies and procedures for the acceptance and continuance of client relationships and specific engagements, designed to provide the firm with reasonable assurance that it will only undertake or continue relationships and engagements where the firm:

  • Is competent to perform the engagement and has the capabilities, including time and resources, to do so;
  • Can comply with relevant ethical requirements; and
  • Has considered the integrity of the client”

If the issues have been identified, and the firm decides to accept or continue the client relationship or a specific engagement, the firm shall document how the issues were resolved.

As per paragraphs 12 and 13 of ISA-220 on Quality Control for an Audit of Financial Statements, the engagement partner shall be satisfied that the firm’s policies and procedures were duly followed in acceptance and continuation of client relationship and audit engagement and shall determine that the conclusions reached in this regard are appropriate.

The auditor shall be alert to and appropriately address the following threats while accepting a new engagement or continuing an existing one:

  • Self interest
  • Self-review
  • Familiarity
  • Intimidation
  • Advocacy

Practice


The auditor is generally more careful about accepting the new client because of lack of previous experience with the management and those charged with the governance and knowledge of the business, transactions and associated risks affecting the financial statements. While certain assessment procedures for both the prospective and existing clients would be common, however, they may assume additional importance in case of a new client.

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