Question

Client acceptance is an important part of the pre-engagement planning process for a CPA. For an existing client, this process often involves reviewing the firm's financial performance on the previous year's engagement, debriefing with the prior year team regarding any issues working with the client, reviewing public information about the company's activities during the year, and considering other factors to determine the relative risk to the firm to perform services for that client for another year. For a new client to a firm, the client acceptance process should be a more robust evaluation as a new client brings a relatively unknown level of risk to the firm.

Required:

If you were the audit partner in charge of the new client acceptance process, what would be the three most important pieces of information that you would want to review about that company before engaging to perform an audit for the new client?

Answer 1

Auditor should focuses on three factors:

• personal integrity of the prospective client's management and principals, (the integrity of the principal owners, key management and those charged with governance of the entity)

Personal integrity is an essential quality of the management and principals of a prospective audit client.

The assessment of personal integrity is based principally upon impressions formed by firm personnel and evaluation of information obtained from third parties. If a predecessor auditor exists, the successor may inquire of the predecessor whether all fees billed to the prospective client have been paid. Although full payment of such fees may reflect upon the integrity of the prospective client's management or principals, the fact that such fees have not been paid may affect firm's assessment of the desirability of the prospective engagement.

• Presence of circumstances pointing towards unusual risks in the engagement or requiring special attention,

Different firms may evaluate the inherent risks in a prospective audit engagement differently. For example, one firm may decline acceptance of a prospective engagement involving a public offering of securities, while another firm with extensive experience in public offerings may actively seek such prospective clients.

• other practice management considerations

Even if the prospective client's management and principals are of sterling repute and the business poses no unusual risks, practice- management considerations may still control the decision to accept a prospective engagement. Clearly, one very important consideration in accepting an engagement is whether satisfactory fees will be collected for the work performed. Another important consideration is how the engagement will affect future workloads and scheduling constraints.