In the process of audit client acceptance or continuance, it is the responsibility of the CPA practitioner to uphold public trust by carefully choosing the client that they want to be associated with. The process of selecting the right client can make or break an auditing firm or the CPA practitioner. The auditing firm and the CPA practitioner should have sufficient and good understanding of the appropriate policies and procedures that have been implemented when determining whether a new client is to be accepted, as well as the continuance of those client relationship.
Client acceptance or continuance is one of the most critical decision-making step in the audit process. A poor decision can lead to reputational loss or potential lawsuits. Philippine Standards on System of Quality Management (PSQM) 1 and Philippine Standards on Auditing Revised (PSA 220) require auditing firms and CPA practitioners to develop, implement, and document their system of quality management in regard to client acceptance and continuance policies.
Before a new client or a recurring engagement is accepted, appropriate information is gathered and evaluated as a basis for deciding whether to accept a new client or retain an existing client. Auditing firms and CPA practitioners shall avoid associating with clients whose management lacks integrity and with questionable reputation.
It is necessary that the auditing firm or the auditor should establish quality objectives that address the acceptance and continuance of client relationship. One quality objective is for the auditing firms and CPA practitioners to use his judgment as a support on whether to accept or continue a client relationship based on the sufficiency of information obtained about the nature and circumstances of the engagement and the integrity and ethical values of the client’s management and those charged with governance. Another quality objective is for the auditing firms and CPA practitioners to check its ability to perform the engagement in accordance with professional standards and applicable legal and regulatory requirements.
A client acceptance or continuance consists principally of two phases: (1) information gathering and information evaluation.
In general, an auditing firm and auditor shall gather the following information before accepting a new client or to continue servicing an existing client –
- The industry of the entity for which the engagement is being undertaken and relevant regulatory factors;
- The nature of the entity, for example, its operations, organizational structure, ownership and governance, its business model and how it is financed;
- The nature of the underlying subject matter and applicable criteria.
The information obtained to support the firm’s judgment about the integrity and ethical values of the client may include the identity and business reputation of the client’s principal owners, key management, and those charged of governance.
Some examples of factors that may affect the nature and extent of information obtained about the integrity and ethical values of the client may include the nature of the entity for which the engagement is being performed, the nature of the client’s operations, indications of a client-imposed limitation in the scope of work, the reasons for the proposed appointment of the firm and non-reappointment of the previous auditing firm and the identity and business reputation of related parties.
The firm may obtain the information from a variety of internal and external sources, including:
- In the case of an existing client, information from current or previous engagements, if applicable, or inquiry of other personnel who have performed other engagements for the client.
- In the case of a new client, inquiry of existing or previous providers of professional accountancy services to the client, in accordance with relevant ethical requirements.
- Discussion with other third parties, such as bankers, legal counsel and industry peers.
- Background searches of relevant databases.
The auditor should be satisfied that appropriate procedures regarding the acceptance and continuance of client relationships and specific audit engagements have been followed and that conclusions reached are appropriate and have been documented.
All information gathered shall be properly evaluated to decide whether to accept a new client or retain an existing client. For example, if your background or internet searches produced a politically exposed person, you need to evaluate whether that politically exposed person would be a risk contributor in the engagement.
The auditing firm and the auditor shall initiate the decision-making process for acceptance or continuance regarding the audit engagement. Regardless of whether the engagement partner initiated that process, the partner determines whether the most recent decision of accepting an existing client remains appropriate.
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Mr. Wilfredo A. Baltazar
Chief Inspector
PRBoA – Quality Assurance Review Office