LECTURE 4:

CLIENT ACCEPTANCE

Learning objectives
After studying this chapter, you should be able to:
▪ Explain what is meant by client acceptance.
▪ Describe the seven primary procedures involved in the client
acceptance process.
▪ Understand the main reasons for obtaining an understanding of
client’s business and industry.
▪ Know the sources of client information and the methods for
gathering the information.
▪ Discuss the ethical and competency requirements of the audit
team.
▪ Know what is required in using the work of another auditor.

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 Learning objectives
▪ Understand the auditor’s responsibility in using the work of an
expert.
▪ Describe the procedures for communicating with an existing
(predecessor) auditor.
▪ Know the contents of a client audit engagement proposal.
▪ Express the differences between items covered in an audit
engagement proposal to existing clients and one for new clients.
▪ Explain on what basis audit fees are negotiated.
▪ Understand what an audit engagement letter includes and why its
contents are important.
▪ Describe the differences between items covered in an audit
engagement proposal to existing clients and one for new clients.

4.1. Client acceptance: The first step on

Journey to an Opinion

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4.2. Evaluate the Client’s Background
❖ The auditor should obtain knowledge of the
client’s business that is sufficient to identify
and understand the events, transactions, and
practices that may have a significant effect on
the financial statements or on the audit report.

4.2. Evaluate the Client’s Background

❖ The main reasons for obtaining the understanding:

• to evaluate the engagement risks associated with
accepting the specific engagement and
• to help the auditor in determining whether all
professional and ethical requirements (including
independence, competence, etc.)

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4.2. Evaluate the Client’s Background

4.2. Evaluate the Client’s Background

❑ Topic of discussion with client’s management and staff including the
importance of evaluating governance, internal controls and possible risks as
following:
• changes in management, organisational structure, and activities of the client;
• current government regulations affecting the client;
• current business developments affecting the client such as social, technical
and economic factors;
• current or impending financial difficulties or accounting problems;
• susceptibility of the entity’s financial statements to material misstatement due
to error or fraud;
• existence of related parties;
• new or closed premises and plant facilities;
• recent or impending changes in technology, types of products or services and
production or distribution methods;
• changes in the accounting system and the system of internal control
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4.3. Evaluate the Client’s Background
❑ New client Investigation
• investigate to determine if the client is acceptable and if the
auditor can meet the ethical requirements of independence,
specific competence, etc.
• obtain sources of information to investigate
• may hire a professional investigator or use its forensic
accounting department to obtain information about the
reputation and background of the key members of
management.
• If there has not been a previous auditor, more extensive
investigation may be undertaken.

4.2. Evaluate the Client’s Background

❑ Continuing Clients
▪ Many auditing firms evaluate existing clients every year.
▪ The auditor will consider any previous conflicts over scope of the audit, type
of opinion and fees, pending litigation between the audit firm and client, and
management integrity.

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4.3. Ability to Meet Ethical and Specific
Competence Requirements
▪ Ethics Requirement
▪ Litigation and Independent
▪ Specific Competences
▪ Partner Rotation
▪ Group Audit

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4.3. Ability to Meet Ethical and Specific

Competence Requirements
▪ Ethics Requirement:
The auditor will ensure that the members of the auditor
team as well as the entire audit firm meet the relevant
ethics requirements (see Chapter 2), especially such as:
▪ check personal financial investments of partners and
employees and the business relationships with the
potential audit client.
▪ Review the non-audit services his audit firm are
providing or have recently been providing to this
potential client.
▪ Review audit fees
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4.3. Ability to Meet Ethical and Specific
Competence Requirements
▪ Litigation and Independence
If the client is involved in litigation with the auditor, to
continue to audit the client could jeopardise independence.
The commencement by a client or other third party of
proceedings against the auditor would compromise
independence.
Ex: The commencement of litigation by the auditor alleging
such as fraud or deceit by the officers of a company,…

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4.3. Ability to Meet Ethical and Specific

Competence Requirements
▪ Specific Competences
Audit team members must have a degree of technical
training and proficiency required in the circumstances.
There should be sufficient direction, supervision and
review of work at all levels in order to provide reasonable
assurance that the work performed meets appropriate
standards of quality.

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4.3. Ability to Meet Ethical and Specific
Competence Requirements
▪ Specific Competences => reviewing existing partner and
staff competencies, for:
• knowledge of relevant industries or subject matters;
• experience with relevant regulatory or reporting requirements,
or the ability to gain the necessary skills and knowledge in an
effective manner;
• ability to complete the engagement within the reporting
deadline; experts are available, if needed;
• individuals meeting the criteria and eligibility requirements to
perform engagement
• quality control review are available.

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4.3. Ability to Meet Ethical and Specific

Competence Requirements
▪ Partner Rotation:
In some countries audit partners must be rotated every
specified number of years (see Chapter 2)
▪ require that audit partners should rotate once every seven
years (European Union Guidelines).
▪ requires that audit partners rotate at least every five years
(The Sarbanes–Oxley Act of the USA).
▪ Group Audit: practical assistance to auditors in the
audit of group financial statements

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4.4. Use of Other Professionals in
the Audit
▪ Using the Work of another Auditor
• Part of the search for background information includes
considering if another auditor will be required to audit a
component of the business such as a division in another country
=> consider the impact of using the work of another auditor on
the combined financial statements (ISA 600).
• The group auditor take sole responsible for expressing an audit
opinion on whether the group financial statements give a true
and fair view (or are presented fairly, in all material respects) in
accordance with the applicable financial reporting framework

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4.4. Use of Other Professionals in

the Audit
▪ Using the Work of an Expert
• If the auditor requires special expertise or lack the expertise of
a person trained for another profession, the auditor should
consider hiring an expert to assist in gathering the necessary
evidence =>ISA 620 defines an expert as an individual or
organisation possessing expertise in a field other than
accounting or auditing, whose work in that field is used by the
auditor to assist the auditor in obtaining sufficient appropriate
audit evidence.
• the auditor should determine the expert’s skills and
competence by considering professional certifications,
experience and reputation.
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4.5. Communicating With the Predecessor
(Existing) Auditor
▪ when a new auditor will replace an existing auditor, the code of
ethics advises the new, proposed auditor to communicate with
the existing accountant (auditor).
▪ The extent to which an existing accountant can discuss the
affairs of the client with the proposed accountant will depend on
receipt of the client’s permission and the legal or ethical
requirements relating to this disclosure.
▪ The purpose of this communication is to reduce or eliminate
threats by getting information on any facts or circumstances
that, in the existing accountant’s opinion, the proposed
accountant needs to be aware of before deciding whether to
accept the engagement.
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4.5. Communicating With the Predecessor

(Existing) Auditor
▪ Request Permission of Client
• Auditor will generally need to obtain the client’s permission, in
writing preferably, to initiate discussion with an existing accountant
(auditor).
• Once the permission of the client is obtained, the existing accountant
shall comply with the request. Where the existing accountant
(auditor) provides information, the auditor must provide it honestly
and unambiguously.
• If the client denies the existing auditor permission to discuss its
affairs with the proposed successor auditor or limits what the existing
auditor may say, that fact should be disclosed to the proposed
successor auditor.
• If the proposed accountant is unable to communicate with the
existing accountant, the proposed accountant shall take reasonable
steps to obtain information about any possible threats by other means
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4.5. Communicating With the Predecessor
(Existing) Auditor
▪ First Time Engagements
ISA 510 suggests:
“ In conducting an initial audit engagement, the objective
of the auditor with respect to opening balances is to
obtain sufficient appropriate audit evidence about
whether: (a) Opening balances contain misstatements that
materially affect the current period’s financial statements;
and (b) Appropriate accounting policies reflected in the
opening balances have been consistently applied in the
current period’s financial statements, or changes made
are appropriately accounted for, presented and disclosed
in accordance with the applicable financial reporting
framework” .
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4.5. Communicating With the Predecessor

(Existing) Auditor
▪ First Time Engagements
• Assure that the opening balances and accounting policies
are correct when the prior period financial statements were
audited by another auditor and review the predecessor
auditor’s working papers.
• Consider the professional competence and independence of
the predecessor auditor.
• If the prior period’s auditor’s report was not the standard
unqualified opinion, the new auditor should pay particular
attention in the current period to the matter which resulted
in the modification.

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4.6. Acceptance by the Client – The
Engagement Proposal
▪ Aspects of the procedures for the engagement proposal may be
found in ISA 210 ‘Agreeing the Terms of Audit
Engagements.’ The auditor and the client should have a
mutual understanding of the nature of the audit services to be
performed, the timing of those services, the expected fees,
audit team, audit approach, audit quality, use of client’s
internal auditors, and the transition needs.
▪ Two basic types of audit engagement proposals: those to
continuing clients and those for new clients.

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4.6. Acceptance by the Client – The

Engagement Proposal
▪ Continuing Client Audit Proposal
• a review of how the auditing firm can add value, both to
the company in general and to those directly responsible
for the engagement of the auditor, for example the Audit
Committee;
• plans for further improvement in value added including
discussion of present regulatory trends, audit scope, and
any recent changes in the company that may affect the
audit;
• a description of the audit team and any changes in the audit
team from the previous year;
• a detailed fee proposal.
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4.6. Acceptance by the Client – The
Engagement Proposal
▪ New Client Audit Proposal

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4.6. Acceptance by the Client – The

Engagement Proposal
Establishing and Negotiating Audit Fees
▪ a professional accountant in public practice may quote
whatever fee is deemed appropriate.
▪ Professional fees should be a fair reflection of the value of the
professional services performed for the client, taking into
account: the skill and knowledge required, the level of training
and experience of the persons engaged in performing the
professional services, the time required, and the degree of
responsibility that performing those services entail.

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4.7. The Audit Engagement Letter
❖ Definition of Engagement Letter:

An engagement letter is an agreement

between the accounting firm and the client for
the conduct of the audit and related
services.

▪ Auditor sends an engagement letter, preferably before the commencement

of the engagement, to help in avoiding misunderstandings with respect to
the engagement.
▪ An auditor’s engagement letter documents and confirms his acceptance of
the appointment, the objective and scope of the audit, the extent of auditor
responsibilities to the client, and the form of any reports
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4.7. The Audit Engagement Letter

❖ Contents of the Engagement Letter:
▪ The objective of the audit of financial information.
▪ The responsibilities of the auditor.
▪ Management’s responsibility.
▪ The applicable financial reporting framework.
▪ Reference to the expected form and content of any reports
to be issued by the auditor and a statement that there may
be circumstances in which a report may differ from its
expected form and content.

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4.7. The Audit Engagement Letter
❖ The auditor may also wish to include in the letter:
▪ Elaboration of the scope of the audit
▪ The form of any other communication of results of the audit engagement.
▪ The fact that because of the test nature and other inherent limitations of an
audit, together with the inherent limitations of any system of internal control,
▪ Arrangements regarding the planning and performance of the audit,
including the composition of the audit team.
▪ The expectation that management will provide written representations.
▪ The agreement of management to make available to the auditor draft
financial statements and any accompanying other information in time to
allow the auditor to complete the audit in accordance with the proposed
timetable.
▪ The agreement of management to inform the auditor of facts that may affect
the financial statements, of which management may become aware during
the period from the date of the auditor’s report to the date the financial
statements are issued.
▪ A request for the client to confirm the terms of the engagement by
acknowledging receipt of the engagement letter.
▪ The basis on which fees are computed and any billing arrangements.
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4.7. The Audit Engagement Letter

❖ Recurring audits:
The auditor may decide not to send a new engagement letter
each year. However, he should consider sending a letter in any of
the following circumstances:
▪ where there is an indication that the client misunderstands the
objective and scope of the audit
▪ where the terms of the engagement are revised;
▪ where there has been a recent change in management;
▪ where the size or nature of the business has changed; and
▪ where there are legal requirements that an engagement letter be
written

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4.7. The Audit Engagement Letter

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4.7. The Audit Engagement Letter

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