Question

In your opinion, why is it important to exercise due diligence and sound professional judgment when accepting new audit clientele?

Do you feel it is appropriate to contact predecessor auditors to gather information about a potential new client? Why or why not?

Answer 1

Before accepting a new audit client, a professional shall determine whether acceptance would create any threats to compliance with the fundamental principles. In order to know the threats regarding the acceptance the professional shall exercise due diligence, and a sound professional judgment shall be imposed.

Potential threats to integrity may be created, for example, questionable issues associated with the client (its owners, management or activities).  Further threats could arise for example, if members of the audit firm hold shares in the client or there are family relationships.

When approached to take on a new audit client, the professional shall investigate the potential client, its owners and business activities in order to evaluate whether there are any questions over the integrity of the potential client which create unacceptable risk. These investigations are usually performed as ‘know your client’ or ‘client due diligence’ procedures.

If threats are discovered, it may not mean that the client must be turned down, as safeguards could potentially reduce the threats to an acceptable level.

Ethical matters to evaluate in relation to a potential new engagement, for example, whether any conflict of interest or confidentiality issues could arise, and if so, whether appropriate safeguards can be put in place. The firm’s competence to perform the potential work should be evaluated using professional judgement.

The purpose of the predecessor-successor auditor communications is to help an auditor determine if a firm should engage with a new client. This communication will inform the auditor about the history of the client with the previous auditor and possibly expose some information. It is important to carefully choose with whom a firm engages in an agreement with for representing them as their auditor. Not only is the firm’s reputation at stake but they can be held liable for their client’s fraudulent activities.

According to SAS no. 84, the successor cannot accept the new client until they have communicated with the predecessor and have reviewed their responses. Even though the successor is required to initiate the communication, the predecessor is required to respond. The predecessor is required to get permission from the client before providing any information about the client. This means that there is a possibility that the predecessor will state that they will not be providing any information but they must respond stating this. If the predecessor doesn’t provide any information, this most likely means that the client doesn’t want them to disclose some potentially harmful information about the client and raises some concerns about accepting the new client.