Question

Assume that a CPA has just received a new audit client. The client will be the firm’s largest audit client, and the firm will have to hire one new staff member to staff the engagement. The fees will represent 25% of the firm revenues. Apply the conceptual framework for members in public practice to this situation.

Answer 1

The Conceptual framework provides a 4-step process to analyze if there arises any difficulty in complying with the standards when providing services to the clients. The steps and their application in the given situation are as follows:

1. To identify if there are any threats: The CPA received a client, who is going to be the largest one contributing 25% of total revenues of the firm. As the new client contributes significant percentage of revenue, there is a threat.

2. Evaluate threats: The CPA must evaluate if the firm can survive even if the revenues come down in future due to any circumstances while servicing the client. The CPA must evaluate if the work can be performed on an objective manner despite the fear of losing the client, and thereby large volume of business.

3. Identify safeguards: As the risk is issuing an unjust or biased opinion in the audit report, the CPA must identify controls in place in the firm to ensure work is performed in an objective manner and report to be issued will be fair and just. The CPA can also take the help of other partners or colleagues in the fraternity to give an opinion on the work performed.

4. Evaluate safeguards: The CPA may implement new controls or have enough controls existing at the firm. The CPA must evaluate whether the controls are effectively functioning and no one in the organization can override them.

Once the CPA is assured of the controls and the risk is being addressed, he may accept the client. Otherwise, it is advisable to direct the client to other CPAs.