Question

What services require auditors to be independent? How does an auditor decide whether to accept or reject a client? What should the auditor consider?

Answer 1

IFAC’s Code of Ethics for Professional Accountants states: ‘Before accepting a new client relationship, a professional accountant in public practice shall determine whether acceptance would create any threats to compliance with the fundamental principles. Potential threats to integrity or professional behaviour may be created from, for example, questionable issues associated with the client (its owners, management or activities).’ This means that when approached to take on a new client, the firm should 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 investigative actions are usually performed as ‘know your client/customer’ or ‘customer due diligence’ procedures, which are also carried out in order to comply with anti-money laundering regulations.

Once a client has been accepted, the firm should consider the suitability of the specific engagement it has been asked to perform. In particular there may be ethical threats which mean that the engagement should not be accepted, in particular whether there are any threats to objectivity. Potential threats could arise for example, if members of the audit firm hold shares in the client or there are family relationships. 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.

IFAC’s Code of Ethics for Professional Accountants states: ‘Before accepting a new client relationship, a professional accountant in public practice shall determine whether acceptance would create any threats to compliance with the fundamental principles. Potential threats to integrity or professional behaviour may be created from, for example, questionable issues associated with the client (its owners, management or activities).’ This means that when approached to take on a new client, the firm should 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 investigative actions are usually performed as ‘know your client/customer’ or ‘customer due diligence’ procedures, which are also carried out in order to comply with anti-money laundering regulations.

Once a client has been accepted, the firm should consider the suitability of the specific engagement it has been asked to perform. In particular there may be ethical threats which mean that the engagement should not be accepted, in particular whether there are any threats to objectivity. Potential threats could arise for example, if members of the audit firm hold shares in the client or there are family relationships. 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.IFAC’s Code makes it clear that acceptance decisions are not to be treated as a one-off matter. The Code states: ‘It is recommended that a professional accountant in public practice periodically review acceptance decisions for recurring client engagements.’ Changes in the circumstances of either the client, or the audit firm may mean that an engagement ceases to be ethically or professionally acceptable or creates a heightened level of risk exposure. Therefore, client continuance assessments are important and should be fully documented.

ISA (NZ) 210 Agreeing the terms of the audit engagement establishes the preconditions for accepting an audit, which are:

an acceptable financial reporting framework has been used in the preparation of the financial statementsthose charged with governance agree that they acknowledge and understand their responsibilities.

If the preconditions for an audit are not present, the auditor must discuss the matter with those charged with governance. Unless required by law or regulation to do so, the auditor must not accept the engagement.

ISA (NZ) 220 Quality control for an audit of financial statements deals with those aspects of engagement acceptance that are within the control of the auditor. The engagement partner must be satisfied that appropriate procedures regarding the acceptance and continuance of client relationships and audit engagements have been followed, and must determine that conclusions reached in this regard are appropriate. PES 3 Quality control for firms that perform audits and reviews of financial statements, and other assurance engagements requires the firm to obtain information considered necessary in the circumstances before accepting an engagement with a new client, and when deciding whether to continue an existing engagement.