What are the factors acceptance and continuance of client relationships and review engagements?

Steps before the acceptance of an audit client

Table of Contents Show

Outgoing Auditor, Professional Etiquette Letter
New Relationships
Are They Ethical?
Are You Independent?
Do You Have the Technical Ability to Serve Them?
Do You Have the Capacity to Serve Them?
The Continuance Decision
Risk Assessment Starts Now
The Strangest Audit Ever
Next Post in this Series
Review Quiz

Client Acceptance or Continuance– Need to Know when to say no or yes. Asking the right questions from the client while considering new clients or continuance of existing clients, is a key first step for establishing a quality audit and relationship between the auditor and client.

Obtaining, accepting, continuing audit engagements

Outgoing Auditor, Professional Etiquette Letter

The auditor should communicate with the outgoing auditor, and the client to assess if there are any ethical or professional reasons why they should not continue the appointment.

They should obtain permission from the client’s management to contact the outgoing auditor, if the client denies the permission, then the engagement should be refused. The previous auditor must obtain permission from the client’s management to respond to the new auditor. if not given, then the auditor should refuse the engagement.

Outgoing Auditor, Professional Etiquette Letter

2. Reputation and integrity of the client’s management assessed- If necessary, the firm may want to obtain references if they do not formally know the directors

Formalities relating to the removal of outgoing auditor fulfilled

3. Consider the level of risk attached to the audit and whether this is acceptable to the firm. As part of this, they should consider whether the expected audit fee is adequate in relation to the risk of auditing the client screening

The purpose of client screening procedures is to determine whether the prospective client is suitable for the audit firm or not. The firm needs to evaluate the potential risk to the firm of acceptance.

When a client is considered to represent a high audit risk to the firm, the firm should carefully consider the implications arising should it fail in meeting its objective of giving an honest audit opinion.

If the firm is not confident that the benefit to be obtained from accepting the appointment outweighs the potential risks (including the financial and repetitional risk of being sued), then the firm should decline the appointment. Factors to consider: –

The state of the economic sector in which the client operates (a depressed sector may indicate risk).
– The client’s previous audit history (frequent changes of auditors, and/or qualified reports, are obviously bad news). –

The experience and qualifications of the company’s management and their attitude towards controls. – The current operating and financial situation of the company. – Directors’ understanding of External Auditor’s role and their own responsibilities–

The accounting policies used– Evidence of client involvement in fraudulent or illegal activities. – Management permission or refusal to allow auditors to examine significant documents, such as the minutes of directors’ meetings.

1. Any issues which might arise could threaten compliance with ACCA’s Code of Ethics and Conduct or any local law, including independence and conflict of interest with existing clients.

If issues come, then their significance must be considered.

2. Whether they are competent to perform the work and whether they would have appropriate resources (especially human resources and time!) available, as well as any special skills or knowledge required for the audit

Read More: Threats to auditor’s independence

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Guidelines establishing whether to accept or continue a client relationship in accordance with our policies

Our policies and procedures also include assessments of risk in support of decision making regarding the acceptance and continuance of client relationships and engagements (read more here). Strict compliance with these policies and procedures is essential for us to provide professional services with the quality and integrity necessary to build more ethical and sustainable markets.

Acceptance of prospective clients

Identification of risks through background checks on the company, its management, its businesses and other relevant matters, with a focus on integrity.
Acceptance or otherwise of a client is determined by the evaluating partner, and approved by the risk management partner when necessary.

Evaluation of risks, the competence of the client’s financial management team, and any additional safeguards needing to be introduced to help mitigate the identified risks
Evaluation of other relationships with and services provided by KPMG to the prospective client that are unrelated to the engagement in order to avoid potential conflicts of independence
Acceptance of an engagement is approved by the potential engagement leader and another senior professional, when necessary

The continuance of clients and engagements is assessed every 12 months, or less if specific integrity issues or circumstances potentially interfering with the commercial relationship are identified. The company’s risk factors are reviewed, as well as any developments affecting the continuity of the services provided.

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Client acceptance and continuance may be the most critical step in an audit, but it’s one that gets little attention. A prospective client calls saying, “Can you audit my company?” and we respond, “sure.” While new business can be a good thing, relationships need appropriate vetting. Not doing so can lead to significant (and sometimes disastrous) consequences.

New Relationships

My daughter recently met a young man on Instagram. Not unusual these days. But now the relationship is entering into its third month. They talk every day for two or three hours. So far, they have not been in the same room—and not even in the same city. Skype, yes. Physical presence, no. That’s happening at the end of this month. (He lives eight hours away.)

So what do Mom and Dad think about all of this? Well, it’s fine. My wife checked him out on Facebook (I know you’ve never done this). And my daughter has told us all about the “fella” and his family. We like what we’re hearing. He has similar beliefs. He has a job (Yay!), and he has graduated from college. His family background is like ours.

Why do we want to know all the details about the young man? Because relationships impact people—my daughter, the young man, his family members, and yes, my wife and I. We want everyone to be happy.

And that’s what good relationships create. Happiness. The same is true with clients. As Steven Covey said, “think win, win.” When the customer wins, and your CPA firm wins, everyone is happy. Mutual needs are met.

Careless CPAs accept business with only one consideration: Can I get paid?

While getting paid is important, other factors are also critical.

Before accepting an audit engagement consider:

Are they ethical?
Are you independent?
Do you have the technical ability to serve them?
Do you the capacity to serve them?

Are They Ethical?

I want my daughter to marry a guy with beliefs that correspond with who she is. Is he honest? Would he steal? Is he transparent? Who are his associates? What do others think of him?

We ask similar questions about accepting a new client. Audit standards require us to consider whether the prospective client has integrity. If the company is not morally straight, then there’s no need to move forward. Ethics is a key to client acceptance.

(The predecessor auditor can provide information about their interactions with the company. Audit standards require contact with the predecessor auditor prior to acceptance.)

Are You Independent?

Independence is another key to client acceptance. And the time to determine your firm’s independence is the beginning—not at the conclusion of the audit.

Consider what happens—during a peer review—when a firm is not independent, and it has issued an audit opinion. The original audit report will be recalled, and I’ll bet the company asks for and receives a full refund of your audit fee. Now, the company needs to be re-audited. (Oh, and there’s that impact on the peer review report.)

Pay attention to requested nonattest services—such as preparation of financial statements. If the client has no one with sufficient skill, knowledge, and experience to accept responsibility for such services, you may not be independent. See the AICPA’s Plain English Guide to Independence for more information. (You can see additional help-aids in my list of online resources for CPAs. )

Do You Have the Technical Ability to Serve Them?

If you can pick up a client in an industry in which you have no experience, should you? Possibly, but it depends on whether you can appropriately understand the client and their industry before you conduct the engagement. Some new customers may not be complicated. In those cases, CPE may get you into position to provide the audit.

But what if the potential engagement involves a highly sophisticated industry and related accounting standards for which you are ill-equipped? It may be better to let the engagement go and refer it to an audit firm that has the requisite knowledge. Or maybe you can partner with the other firm.

Do You Have the Capacity to Serve Them?

A prospective client calls saying, “Can you audit my company? We have a December 31 year-end, and we need the audit report by March 31.” After some discussion, I think the fee will be around $75,000. But my staff is already working sixty hours a week during this time of the year. Should I take the engagement?

My answer would be no unless I can create the capacity. How? I can hire additional personnel or maybe I can contract with another firm to assist. If I can’t build additional capacity, then I may let the opportunity pass.

Far too many firms accept work without sufficient capacity. When this happens, corners are cut, and staff members and partners suffer. Stuffing—even more—work into a stressful time of the year is not (always) a wise thing. We lose staff. And if the engagement is deficient, peer review results may take a hit.

When you don’t have the capacity to accept new good clients, consider whether you should discontinue service to existing bad customers.

The Continuance Decision

Quality controls standards call for CPAs to not only develop acceptance procedures, but we are to create continuance protocols as well.

I previously said CPAs often don’t give proper attention to acceptance procedures. So, how about continuance decisions? Even worse.

Each year, we should ask, “If this was a new client opportunity, would I accept them?” If the answer is no, then why do we continue serving them?

Here are a few questions to ponder:

Has the client paid their prior year fees?
Am I still independent (consider the new Hosting Services interpretation)?
Does the client demand more from me than the fee merits?
Do I enjoy working with this client?
Is the client’s financial condition creating additional risks for my firm?
Is the client acting ethically?

Each year, well before the audit starts, ask these questions.

And then consider, is the bottom 10% of my book of business keeping me from accepting better clients? My experience has been that when I have the capacity, new business appears. When capacity is lacking, I don’t. The decision to hold on to bad clients is a decision to close the door to better clients. Don’t be afraid to let go.

Risk Assessment Starts Now

When should we start thinking about risk assessment? Now.

Whether you are going through the initial acceptance procedures or you are making your continuance decision, start thinking about risk assessment now. Assuming you accept the client, you’ll be a step ahead as you begin to develop your audit plan. Ask questions such as:

How is your cash flow?
Do you have any debt with covenants?
Who receives the financial statements?
Has the company experienced any fraud losses?
How experienced is management?
Why are you changing auditors?

Keep these notes for future reference and audit planning.

The Strangest Audit Ever

As I close this post, I thought I’d share an old war story. One where I did not perform client acceptance correctly. You’ll find this story hard to believe. But it’s true.

Next Post in this Series

The above is the first post in The Why and How of Auditing. My next post will be Audit Risk Assessment: The Why and How. Subscribe to my blog (see below) to make sure you don’t miss anything.