AWP client accept and continue

​

Client Continuance and Acceptance Case Example: ABC Manufacturing Company

Context

ABC Manufacturing Company has approached a new audit firm for its annual audit. The firm must evaluate the potential client for acceptance. Additionally, for existing clients, the firm periodically reassesses the client relationship to decide on continuance.

Audit Objective

To assess the risks and appropriateness of entering into or continuing an audit engagement with ABC Manufacturing Company, considering factors such as the company’s business practices, financial stability, and the integrity of its management.

Types of Audit Evidence and Documentation for Client Continuance and Acceptance

1. Preliminary Engagement Activities

• Case: Perform background checks on ABC Manufacturing Company, including legal status, business operations, financial health, and reputation in the market.

• Documentation: Document the results of the background checks, highlighting any red flags or areas of concern that could impact the decision to accept or continue the client.

2. Assessment of Management Integrity

• Case: Evaluate the integrity of ABC Manufacturing Company’s management through inquiries, reference checks, and review of public information.

• Documentation: Summarize the findings related to management’s integrity, including any issues related to ethical behavior, compliance with laws and regulations, and financial reporting practices.

3. Independence Considerations

• Case: Assess the audit firm’s independence, ensuring there are no conflicts of interest or other factors that could impair objectivity.

• Documentation: Prepare an independence confirmation statement detailing the assessment of independence in relation to ABC Manufacturing Company, noting any potential threats and safeguards applied.

4. Engagement Risk Assessment

• Case: Conduct a risk assessment for the proposed audit engagement, considering factors such as the complexity of the business, the risk of material misstatement, and the audit firm’s ability to perform the audit effectively.

• Documentation: Document the risk assessment process, including the criteria used, risk ratings assigned, and any mitigating factors or strategies to address high-risk areas.

5. Review of Previous Audits and Consultations

• Case: For continuance decisions, review findings from previous audits, including unresolved issues, disagreements with management, and the effectiveness of the audit process.

• Documentation: Summarize the review of previous audits, noting any patterns of concern, improvements in the client’s operations or financial reporting, and the outcome of any consultations or second opinions sought.

6. Decision-making and Documentation

• Case: Based on the collected evidence and assessments, make a decision regarding the acceptance or continuance of ABC Manufacturing Company as a client.

• Documentation: Prepare a final decision memo that outlines the rationale for the decision to accept or continue the client, including any conditions or concerns that need to be addressed as part of the engagement.

7. Engagement Letter

• Case: If the decision is to proceed with the engagement, draft an engagement letter that outlines the scope, objectives, and terms of the audit.

• Documentation: Include a copy of the signed engagement letter, detailing the agreed-upon audit terms, responsibilities of both the audit firm and ABC Manufacturing Company, and any specific engagement conditions.

Conclusion

For client continuance and acceptance, auditors meticulously gather and document evidence to make informed decisions regarding the risks and suitability of entering into or continuing an audit engagement. This process ensures the audit firm’s compliance with ethical and professional standards and supports the foundation for a transparent and effective audit. Through comprehensive documentation, the audit firm substantiates its rationale for the decision, safeguarding its integrity and the quality of its audit services.