Auditing: Should the Client Be Accepted?

Article excerpt

The decision to accept a new audit engagement, and the procedures a firm performs in investigating prospective clients are important in the management of a CPA firm's practice. Of course, some prospective clients are of such high repute there is line doubt the prospective engagement will be accepted. In other instances, firm personnel may have line knowledge of the business, management, or principals of the prospective client. This article discusses factors a CPA firm should consider in deciding whether to accept a prospective audit engagement. Although the article's primary focus is upon decisions to accept audit engagements, most of the points apply to other attest engagements as well as to many other types of engagements.

PRELIMINARY CONFERENCE

When an executive of a prospective client expresses an interest in retaining your firm to perform professional services, a representative of your firm should arrange for a preliminary conference to discuss this possibility with the official The preliminary conference should be held as soon as practicable after the expression of interest has been received.

Topics to be discussed at the preliminary conference will vary depending upon a variety of factors including your firm's familiarity with the client and the client official's familiarity with your firm. At a minimum, you should be prepared to provide information concerning your firm's capabilities, competence in the client's industry, and other types of professional services provided. At the conclusion of the conference, you should know whether a predecessor auditor exists (and if so, why the client is considering changing auditors), whether the appointment is competitive (and if possible, the names of other firms under consideration), and whether a formal engagement proposal is desired. Finally, at the preliminary conference, it is important to advise the client that before any agreement to render services is concluded, it will be necessary for your firm 1) to communicate with any predecessor auditor (both to comply with generally accepted auditing standards and as a professional courtesy to the predecessor auditor), and 2) to perform a pre-acceptance evaluation of the client.

PRE-ACCEPTANCE PROCEDURES

A pre-acceptance evaluation of a prospective client consists principally of two phases: information gathering and information evaluation. Specific procedures a CPA firm may perform during the information-gathering phase are noted below. These procedures are adapted in part from Statement on Quality Control Standards 1 (QC 90), which provides guidance to CPA firms on policies and procedures a firm should adopt concerning acceptance and continuation of clients.

* Obtain and analyze financial statements of the prospective client and other relevant financial information. As part of this analysis, obtain the names of the prospective client's key executives and principals.

* Make inquiries of knowledgeable third parties within the business community as to the reputation of the prospective client's business and the integrity of the prospective client's management and principals. In this regard, comments of existing clients operating in the prospective client's industry are frequently useful, as are comments of the prospective client's legal counsel and bankers and other bankers and lawyers in the business community. In many circumstances, credit reports on a prospective client may prove useful, especially if communications with third parties raise questions concerning the prospective client's acceptability. In isolated instances, a CPA firm may retain a business investigation agency to provide a detailed report on certain prospective client's executives or principals.

* If a predecessor auditor exists, request the prospective client to authorize the predecessor to respond to your inquiries and then make appropriate inquiries of the predecessor. As indicated in SAS 7 (AU 315), the successor should make specific and reasonable inquiries of the predecessor regarding matters that will assist the successor in deciding whether to accept the engagement. …