Audit client acceptance decisions : a local survey

Abstract

This study relates to the need for auditors to perform thorough evaluations of prospective and continuing audit client engagements due to the increased risks and demands associated with auditing the financial statements of companies. This business decision requires the consideration of a number of factors pertaining to the potential audit client. These factors include an evaluation of the potential audit client's integrity, the ability to perform the audit engagement with professional competence, the adherence to the independence principles, the recognition of situations which represent potential conflicts of interest and the consideration of risks in particular circumstances. Primarily through an extensive questionnaire, this dissertation seeks to identify the process undertaken by Maltese audit firms and sole practitioners in accepting their audit clients. Furthermore, it seeks to elicit the perceptions of factors which are assessed in the acceptance of an audit client. This study concludes that pre-defined client acceptance procedures are adopted by all the Big-4 and the majority of the non Big-4 and sole practitioners. Although the application is evident in all three audit practices, the management of these methods is somewhat different. This differentiation relates to the fact that the varied procedures utilized are essentially a consequence of the diverse audit clients with which the auditors associate. It follows that the larger the audit client's business is, the more detailed its client acceptance approach will be. The factors to be considered in accepting an audit client were generally attributed the same level of importance by the differing audit practices. The most significant was that relating to the auditor's competence to carry out the audit, followed by the need for a risk assessment of the potential audit client and an evaluation of the client's management integrity. Independence was considered separately, where it was recognized that the fundamental adherence is to the self-interest, self-review and intimidation threat respectively. Moreover, conflicts of interests are continuously looked out for in the acceptance and continuance of audit engagements. Furthermore, a system of re-evaluating existing audit clients was found to be more consistent with the Big-4 and non Big-4 audit firms. With regards to the practice of drawing up an engagement letter, it was determined that this letter is generally seen as a fundamental document in this process of client acceptance by all the three types of audit practice.