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Accepting a Client and Performing Initial Audit Planning | Auditing and Attestation | CPA Exam

In this video, I discuss audit planning and specifically accepting a new client or continuing a client. In this video, I also discuss the communication protocol between successor and predecessor auditor. #cpaexaminindia #cpaexamevloution #accountingmajor 0:00 Introduction This video discusses the initial steps in audit planning, focusing on four key tasks that auditors need to complete: Assessing clients (0:29): Deciding whether to accept a new client or continue with an existing one, which is crucial to avoid reputational or financial risks (1:09). The video highlights the importance of not just looking at the short-term but also the long-term when accepting a client (1:25). Understanding the reasons for the audit (2:08): Identifying why a client is asking for an audit as it influences subsequent planning. Establishing a mutual understanding with the client (3:20): The importance of clarifying engagement terms, often documented in an engagement letter. Constructing an overarching audit strategy (3:41): Planning the audit, including staffing decisions and whether audit specialists are required. The video also touches on the need for due diligence in investigating new clients (6:48), communicating with predecessor auditors (9:39), and continuously re-evaluating relationships with existing clients (12:45) to manage risk and maintain the firm's reputation. Initial audit planning involves four things, all of which should be done early in the audit: The auditor decides whether to accept a new client or continue serving an existing one. This determination is typically made by an experienced auditor who is in a position to make important decisions. The auditor wants to make this decision early, before incurring any significant costs that cannot be recovered. The auditor identifies why the client wants or needs an audit. This information is likely to affect the remaining parts of the planning process. To avoid misunderstandings, the auditor obtains an understanding with the client about the terms of the engagement. The auditor develops the overall strategy for the audit, including engagement staffing and any required audit specialists. Client Acceptance and Continuance Even though obtaining and retaining clients is not easy in a competitive profession such as public accounting, a CPA firm must use care in deciding which clients are acceptable. The firm’s legal and professional responsibilities are such that clients who lack integrity or argue constantly about the proper conduct of the audit and fees can cause more problems than they are worth. Some CPA firms refuse clients in certain high-risk industries, such as software technology companies or subprime lenders, and may even discontinue auditing existing clients in those industries. Some smaller CPA firms will not do audits of publicly held clients because of the risk of litigation or because of costs associated with registering the audit firm with the PCAOB. An auditor is unlikely to accept a new client or continue serving an existing client if the risk associated with the client is greater than the risk the firm is willing to accept. New Client Investigation Before accepting a new client, most CPA firms investigate the company to determine its acceptability. They do this by examining, to the extent possible, the prospective client’s standing in the business community, financial stability, and relations with its previous CPA firm. For example, many CPA firms use considerable caution in accepting new clients in newly formed, rapidly growing businesses. Many of these businesses fail financially and expose the CPA firm to significant potential liability. The CPA firm must also determine that it has the competency, such as industry knowledge, to accept the engagement and that the firm can satisfy all independence requirements. For prospective clients that have previously been audited by another CPA firm, the new (successor) auditor is required by auditing standards to communicate with the predecessor auditor. The purpose of the requirement is to help the successor auditor evaluate whether to accept the engagement. The communication may, for example, inform the successor auditor that the client lacks integrity or that there have been disputes over accounting principles, audit procedures, or fees. The burden of initiating the communication rests with the successor auditor, but the predecessor auditor is required to respond to the request for information. However, the confidentiality requirement in the Code of Professional Conduct requires that the predecessor auditor obtain permission from the client before the communication can be made. In the event of unusual circumstances such as legal problems or disputes between the client and the predecessor, the predecessor’s response can be limited to stating that no information will be provided.

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