What are the risks that the auditor must consider before accepting a client for an audit engagement?

To access and manage the risk of acceptance or continuation of an audit client is essential and the success of an audit assignment largely depends on the effective management of these risks. If it is not properly managed, then the entire audit process will likely fail and put both the client and auditor in difficult situation later on. Auditor must carefully evaluate the various factors before accepting the audit and devise ways to address the risks.

While evaluating the risks of audit acceptance, auditor must look at what the client’s requirement and objective and what they want to gain out of it. Usually, the clients will list their requirements, and auditor must analyze the same to make sure that the conditions will not negatively impact their business operations or results. The key here is to determine if the risk is high enough to warrant getting the audit findings and then find reasonable solutions to mitigate the risk.

SQC-1 (Standard on Quality control) issued by ICAI requires an audit firm to prepare and establish certain document procedures and policies so that acceptance and continuance of clients becomes easy. This is a very critical for business risk and mitigating litigations. The whole point of this standard is a clear emphasis on the fact that a audit firm must know that the reputation and integrity of a client's management may have some impact on the reliability offered by the financial statements and accounting records produced by the client which even affect the outcome of an audit.

Management's integrity is also one of the risky elements. While low risk requires less evidence, the critical elements of the risk assessment process, i.e., client acceptance and continuance, involving high risk at the financial state level (called "business risk"), require more evidence. Reasonable assurance should be provided by a firm's policies about its undertaking of engagements where the annual evaluation of a client's integrity, management, and government personnel is assured. The firm can comply with the legal and ethical requirements to come to terms with the client.

There are many times when even the audit firms following best industry practices regarding client acceptance fall short diligently on client continuance. It is highly recommended to conduct a regular background check on the client and its management, including bankruptcy and litigation searches, criminal records, and the market report. Each audit client must be reviewed thoroughly on annual basis focusing on the issues including the change in the client's business due to an acquisition, a change in senior management or a new business line. 

Understanding people and learning their body language is also very important. Audit firm must periodically evaluate the relationship with a client and should disengage itself, if necessary, citing the unethical reasons. Though, it is not easy to do so.

Factors to consider while deciding Continuance or Acceptance of a Client

The audit firm or engagement in-charge must investigate the management of new clients to comply with the professional standards and perform the following procedures while exploring:

• Independence in the appearance of the firm.
• Competence of the audit firm to tackle engagements.
• Honesty in management of reporting entity and no involvement in illegal acts.
• Client’s internal control systems, financial reporting and fair financial statements.

 The investigative procedures include:

•  Obtaining credit information and management's permission to communicate for the entity's officers and its former auditors, respectively. 
• Discussion with the entity's attorneys and reviewing reports of former auditors about a prospective client.
• Asking the reason for changing the auditor and investigate crime convictions of officers.
• Conducting inquiries from former auditors about disagreements, uncollected fees, or reasons for the firm not to accept the audit.

Forms about client acceptance and continuation should be reviewed and updated annually to evaluate association with a client and facilitate investigations.

Investigating potential new clients and evaluating existing ones for information enables the audit firm to meet quality clients from the foundation that helps in the risk assessment at the financial statement level and gather supporting evidence on audit engagements.

Acceptance and continuance form of client should have all the basic information that covers all about business and environment of the entity. The development of cost-effective audit schemes and audit plans will be based on the auditor's knowledge of policies, especially for distinctive purpose frameworks. For entities using ad hoc frameworks, the auditor should work timely in the pre-engagement planning process to acquire documentation to support the framework and suit as sociable with specific policies and procedures registered by the entity.

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What factors should an auditor consider before accepting a company as an audit client?

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