Learning Outcomes
After studying this article, you will be able to identify the main factors an auditor must consider before accepting an audit engagement. You will know how to assess client integrity, evaluate ethical and independence risks, confirm the auditor's ability to carry out the audit, and understand the steps required to comply with professional standards and legal obligations.
ACCA Foundations in Audit (FAU) Syllabus
For ACCA Foundations in Audit (FAU), you are required to understand the process and considerations when deciding whether to accept a new audit client. Your revision should focus on:
- Explaining the main factors to consider before accepting an audit engagement
- Assessing threats to independence and objectivity and how they may be addressed
- Understanding client due diligence, including integrity assessment
- Ensuring sufficient resources and audit competence are available
- Identifying the requirement for pre-acceptance communication with outgoing auditors
- Complying with anti-money laundering and ethical obligations
- Recognising the circumstances when an auditor should not accept an engagement
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
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Which of the following is an essential pre-condition for accepting a new audit engagement?
- The client offers a high audit fee
- The auditor has sufficient resources and skills
- The client promises to provide future consulting work
- The prior auditor refuses to communicate
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Why is it important for the incoming auditor to assess the integrity of management before accepting an audit engagement?
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State two procedures an auditor should perform to identify threats to independence before accepting a new audit client.
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What is the purpose of contacting the outgoing auditor before accepting an audit appointment?
Introduction
An auditor's acceptance of a new audit client is a critical decision that affects independence, quality, and legal exposure. The process requires a careful and structured assessment of risks and responsibilities. Auditors must carry out specific pre-engagement procedures to ensure they act within ethical and legal requirements. Poor client acceptance decisions can lead to reputational harm, regulatory sanctions, or legal claims.
Key Factors Before Accepting an Audit Engagement
Auditors are required to perform a series of checks and assessments before agreeing to take on a new audit. These are summarised below.
Client Integrity Assessment
Before accepting an appointment, auditors should obtain information about the prospective client and its management. This includes their reputation, history, involvement in illegal or unethical behaviour, and prior dealings with auditors or regulators.
Key Term: client due diligence
The process of gathering and assessing information to evaluate the honesty, reliability, and background of a prospective audit client and its management.
If there are doubts about the integrity of management or those charged with governance, the auditor should decline the engagement.
Threats to Independence and Objectivity
Auditors must ensure they are, and are seen to be, independent of the prospective client. This involves identifying threats—such as close financial ties, family relationships, or significant fees—and applying safeguards to eliminate or reduce these threats to an acceptable level.
Key Term: independence
Freedom from circumstances or relationships that could impair, or appear to impair, the auditor's unbiased judgement and professional skepticism.Key Term: objectivity
The obligation to be impartial and not allow bias, conflict of interest, or undue influence to compromise professional judgement.
If effective safeguards cannot be implemented, the engagement must not be accepted.
Professional Competence and Resources
The auditor must consider whether they have, or can obtain, the skills, experience, and resources required for the audit. This assessment covers technical ability, industry knowledge, and the capacity to deliver the work within the necessary timeframe.
If necessary specialist knowledge is lacking, and cannot reasonably be sourced, the engagement should be declined.
Communication with Outgoing Auditor
When replacing a previous auditor, the incoming auditor must request permission from the potential client to contact the outgoing auditor. This communication should reveal relevant information, such as reasons for the change or disputes.
Key Term: professional courtesy
The practice of contacting the current or former auditor to discuss matters relevant to a proposed new appointment, ensuring proper conduct and transfer of information.
If permission to contact the existing auditor is refused, the appointment should not be accepted.
Anti-Money Laundering and Legal Compliance
Auditors must comply with anti-money laundering regulations and perform client identification checks. If there is any suspicion of illegal activity or inability to verify the client's identity, the firm should decline the engagement and report as required by law.
Assessing the Engagement Risk
Auditors should evaluate the general and specific risks associated with the potential client, including industry, financial stability, internal control systems, and history of litigation. If the overall risk is unacceptably high and cannot be mitigated, the auditor should refuse the engagement.
Terms of Engagement
Finally, auditors should explain and agree the scope, responsibilities, and terms with the client in a written engagement letter before starting any work.
Worked Example 1.1
A firm is approached by a company whose directors have recently been involved in a lawsuit for fraudulent business practices. The audit fees are attractive. What should the audit firm do?
Answer:
The firm must perform client due diligence, which would reveal the directors' litigation history. Given the serious concerns about management integrity, the appropriate action is to decline the audit engagement, regardless of the potential fee income.
Worked Example 1.2
A prospective client refuses to allow the new auditor to speak with the outgoing auditor, stating it is unnecessary. What should the new auditor do?
Answer:
The incoming auditor should not accept the appointment without first communicating with the outgoing auditor. If permission is refused, this is a warning sign, and the appointment must be declined.
Exam Warning
A common mistake is to focus only on technical knowledge or fees when considering new clients. Examiners want you to show awareness of ethical risks, legal obligations, and the need for pre-appointment checks.
Summary
Before accepting an audit engagement, the auditor must thoroughly consider external and internal risks, independence, client integrity, legal compliance, and competence. Professional standards and legal requirements demand strict adherence to these pre-engagement procedures. Failure at this stage can have serious professional and legal consequences.
Key Point Checklist
This article has covered the following key knowledge points:
- Describe pre-engagement procedures and assessments before accepting an audit
- Define and apply the concept of client due diligence
- Identify and evaluate ethical threats, including independence and objectivity risks
- Recognise the importance of communication with the outgoing auditor
- List key legal and anti-money laundering checks before client acceptance
- State situations where an audit engagement should be declined
- Acknowledge the need for a written engagement letter outlining terms and responsibilities
Key Terms and Concepts
- client due diligence
- independence
- objectivity
- professional courtesy