ABA358-01
Group 09
Au Wing Han 201222219H
Lui Cheuk Lam 201222078H
Wong Ka Yan 201222248H
Client Acceptance
Objectives of a Client Acceptance Program
While client acceptance procedures may differ among firms, the common objective is to
gain insight into the prospective client’s past business practices, the integrity of the
management team and to identify any issues that may create a breach of the accounting firm’s
professional obligations. There are two key elements:
1.) What is the relationship between the prospective client and current and former
lawyers, bankers and with the predecessor accountant?
-A firm should establish how the management team interacts with other professionals and the
reasons why the firm is now seeking a new or different accounting firm. While the prospect
may be changing firms for purely legitimate reasons, it is advisable to verify that the
reasons are not due to a fee dispute or because the prospective client is opinion shopping.
2.) Does the prospective client’s management team meet your firm’s standards of
integrity?
-As an integral part of most engagements, the CPA firm will be relying on the management
of the prospective client to provide meaningful disclosures and representations.
Approach
1. Determining the Integrity of the Prospective Client
Main points:
- Considering the integrity of the client, and it would lead it to conclude that the client lacks
integrity if the firm does not have enough information
- Developing policies for communicating with predecessor auditors to ascertain whether there
are circumstances the firm should take into account in deciding whether to accept the
engagement.
- Receiving the greatest degree of focus in forming a conclusion on whether or not to accept
or continue with a client.
- Full and open access to key personnel and information within the prospective client is
desirable to enable gaining necessary client knowledge and aiding an assessment of the
client’s/management integrity.
To assist in this respect, there is some practical insights below:
1) Access to all the relevant resources within a potential client to enable a thorough
assessment can never be guaranteed for every engagement being considered.
2) The critical nature of these assessments in the context of overall risk management should
be emphasized.
3) The client is not willingly providing information to assist with the assessment could be
viewed as an indicator of higher risk
2. Determining Competency of the Firm to Perform the Engagement
Key to determine the competency is to understand the entity and its industry. As such, a
necessary component of “competency” considerations are questions associated with
“knowledge of the client.” Indicators that extra consideration needs to be given to the
competencies to perform the engagement to the necessary quality are as follows:
a) Complexity of the entity’s structure
b) Complexity of the entity’s transactions, or transactions for which the related accounting
is complex, “emerging” or subject to significant professional judgment/interpretation
c) Entity involvement with off-shore transactions
d) Complex tax arrangements
f) Entities operating within specialized industries such as banking/finance/insurance, real
estate/construction, gaming/gambling, government/public sector enterprises, leasing,
agriculture, etc.
g) An entity which is (or is a significant component of) a public interest entity
***Reducing risks associated with competency and performance***
The risk of being exposed to criticism and negative publicity associated with the adequacy
and quality of professional services cannot be completely eliminated.
Factors which may contribute to reduced exposure to this risk include:
- Diligent investigation of the background and reputation of the potential client;
- Avoiding engagements that involve undue risks;
- Clearly establishing the terms of engagement and setting out unambiguous, achievable
terms of reference;
-Applying a sound audit methodology
-Sensitivity to clients’ and users’ perception of the Firm’s performance.
3. Compliance with Ethical Requirements
Firm should have policies and procedures to ensure compliance with relevant ethical
requirements. There are the key principles and tenets of the International Ethics Standards
Board for Accountants’ Code of Ethics (IESBA Code):
･Integrity
･Objectivity
･Professional Competence and Due Care
･Confidentiality
･Professional Behavior
*Safeguards to consider in addressing conflicts of interest*
Should issues with respect to independence or conflicts of interest be noted in considering
client acceptance, there are actions that could be taken which could help mitigate those risks
to reduce them to an acceptable level:
(a) Act for two or more parties to a transaction or other matter or
(b) Accept other prospective engagements where they could not do so in the absence of
such safeguards. These safeguards would ordinarily include but are not limited to the
following:
(i) Subject to entity and other confidentiality obligations, disclosing the facts and
circumstances of the conflict to the entities concerned
(ii) Obtain the consent of each of the parties concerned.
Also, the following safeguards would ordinarily be considered:
a) Using entirely separate engagement teams to serve each respective client;
b) Establishing effective ethical walls and confidentiality safeguards, such as
information and physical barriers separating engagement teams designed to prevent
the sharing of confidential information;
c) Information technology safeguards such as passwords, limited network access, and
separate printers and fax machines;
d) Instructing individuals on the engagement team, including administrative personnel
who assist the engagement team on the importance of maintaining confidentiality,
including custody of client documents and communication protocols, such as
restricting discussion to those who “need-to-know.”
Client Engagement Procedures
The investigative procedures include:
● Obtaining credit information for the entity and its officers.
● Discussion of the prospective client with the entity's bankers and attorneys.
● Asking the potential client why the entity is changing CPAs.
● Obtaining management's permission to communicate with the entity's former auditors.
● Conducting inquiries of former auditors about disagreements, management's integrity,
uncollected fees, or other reasons why the firm should not accept the audit.
● Reviewing reports of former auditors.
● Asking management if any officers and directors have been convicted of a crime
Common Client Acceptance Documents
• Client acceptance checklist. All of the elements of the acceptance process are listed. Internal
controls prevent the firm from rendering services until “the boxes are checked” and the
partner with final authority signs off.
• Client acceptance information form. A form completed and attested to by prospective client
containing basic information including the names of officers, directors and key employees,
names of prior CPA’s and professionals and a list of professional references.
• Rejection Letter. A formal letter which is vital to document the time of the initial contact
and rejection, especially for prospective clients seeking tax or other time-sensitive services.
CLIENT ASSURANCE INVESTIGATIONS—BEST PRACTICES
(Elective part)
Level 1: Business/Principal Investigation
Level 1 investigations are designed to verify the legal existence of a business and its
principals and typically reveal any major criminal or administrative actions. These
investigations are most often used for prospective clients: that are well known to the firm;
with low dollar volume and in low risk industries; or as a preliminary screening tool to
disqualify prospective clients who will obviously not meet a firm’s client acceptance
standards.
ƒ • Positive identification of business-Secretary of State.
ƒ • Address and social security verification of 2 individuals.
ƒ • National media search on company and 2 individuals.
ƒ • National financial reporting database search on company.
ƒ • National criminal database search on company and 2 individuals.
ƒ • OFAC list of Specially Designated Nationals and Blocked Persons.
ƒ • RAI Scan proprietary database.
ƒ • In-depth analysis and written report.
Level 2: Standard Client Acceptance Investigation
The Level 2 investigation is the standard client assurance investigation used by many large
accounting firms. Some firms start with a Level 1 investigation, make an initial determination
regarding acceptance, and then proceed to the Level 2 investigation for those prospects
passing the Level 1 protocol.
ƒ • All elements of a Level 1 investigation.
ƒ • County criminal records on company and 2 individuals.
ƒ • Federal criminal records on company and 2 individuals.
ƒ • Professional license/education review on 2 individuals.
ƒ • Affiliated Company review on 2 individuals.
ƒ • County court records (plaintiff and defendant) on company/ 2 individuals.
ƒ • Federal court records (plaintiff and defendant) on company and 2 individuals.
ƒ • Financial verification (reporting source, bankruptcy records & tax liens).
ƒ • SEC records (company and 2 individuals).
ƒ • Affiliated companies report on company and 2 individuals.
ƒ • In-depth analysis and written report.
Level 3: Full Due Diligence
A Level 3 investigation is an in-depth inquiry designed to provide: a comprehensive view
of the operating history of a business; the current status of key relationships with clients and
suppliers; and the physical verification of claimed business operations. These investigations
are used in the area of, for example, mergers and acquisitions or transactions where credit
will be extended).
ƒ • All elements of a Level 2 investigation.
ƒ • Applicable administrative agency search (FTC, EPA etc.) up to 3 agencies.
ƒ • Physical verification of facilities (2 US locations or 1 international location).
ƒ • Business reference interviews (up to 3 reference interviews with banks, accountants,
attorneys or others).
ƒ • Development and interview of up to 3 additional sources (customers, vendors or
others).
ƒ • In-depth analysis and written report.
CPA Firm’s Actions of Client Acceptance
CPA firm should take client acceptance procedures extremely seriously. Regardless of the
services firms have been asked to render, they follow rigorous policies and procedures to
assess the risk related to the assignment before agreeing to accept a prospective client and
engagement. The objective is to accept only engagements with an appropriate engagement
risk level. In assessing acceptability of an engagement, the firm considers client and
professional service risks, which generally include the following factors:
● management characteristics and integrity
● organizational and management structure
● nature of the business
● business environment
● financial results
● business relationships and related parties, and
● prior knowledge and experience
The objectives of Client Acceptance and Continuance Policy
● Establish a rigorous process for evaluating risk and making decisions to
accept/continue clients or engagements
● Meet applicable independence requirements
● Identify and deal appropriately with any conflicts of interest
● Identify and decline clients that pose excessive risk
● Require consultation with designated professionals to identify additional risk
management procedures for specific high-risk factors
● Comply with legal, regulatory and professional requirements
The engagement risk assessment procedures are designed to identify risks related to the
engagement and provide a basis for tailoring our audit approach to address engagementspecific risks.
Procedure of accepting an engagement
Before accepting an engagement:
- Not to automatically take on new client engagements or new work for existing clients
- Consider the risk characteristics of a prospective client and several due diligence
procedures
- Determine if the firm can commit sufficient resources to deliver quality service,
especially in highly technical areas
- Complete a risk assessment to determine whether the risk associated with the client.
- Based on the findings of this review, the decision to accept the client and engagement
requires the approval of a recommending partner and the concurrence of at least one
other partner
- Serve only clients competent to serve and meet appropriate standards of legitimacy
and integrity
Ongoing process:
- Engagement acceptance/continuation process and continue throughout the
engagement
- Incorporate risk assessment tools and programs in their audit approach and
documentation to facilitate a comprehensive risk assessment when planning audit
after agreeing to accept the engagement
Annual client continuance process:
- Conduct annual risk reviews of all audit clients
- Review service delivery and ability to continue to provide quality service
- Confirm clients share the firm’s commitment to quality and transparency in financial
reporting.
- Annually reviews relationship with the audit client to determine whether continuance
is appropriate.
Actions of client undergoes a significant change
- Significant change means e.g., change in ownership or management, financial
condition, or nature of entity’s business
- Re-evaluate whether or not the firm should continue to have a relationship with a
client
- Decisions to continue the engagement must be agreed to by at least one other partner
in addition to the recommending partner
On engagements involving international clients, the firm perform their own engagement
acceptance and continuance procedures. The firm does not assume the acceptability of a
client and/or the engagement solely because it has been referred to them from another
member firm.
Engagement letters
Under the terms of engagement policies, the terms of each audit engagement must be
documented annually in a formal engagement letter signed by partner responsible for the
engagement and by the appropriate officer of the client. For public companies, the
engagement letter must also be signed by a representative of the audit committee, or the audit
committee must approve the terms of the engagement by an alternative method.
Conflicts of interest
Firms have put in place policies and procedures to identify and consider potential conflicts of
interest prior to accepting a prospective engagement and prior to the firm entering into a
financial or business relationship with a third party.
The firm needs to set up Central Conflict Check group to maintain a conflicts database, which
contains various internal data to assist in identifying potential conflicts. This database is
integrated with a global conflicts database, which enables the Conflict Check team to work
with their counterparts in other countries when appropriate. When potential conflicts are
identified, the Conflict Check group advises the engagement team on ways to address them.
The firm should also sets up Conflicts of Interest Policy to define global standards for
addressing categories of potential conflicts of interest and a process for identifying them.
Conflicts of Interest Policy
● Provisions for managing potential conflicts of interest as quickly and efficiently as
possible through the use of appropriate safeguards
● Obtaining a client’s consent for member firms to act for two or more clients to
declining an engagement in order to avoid an identified conflict
● Consider the increasing complexity of our engagements and client relationships, and
the need for speed and accuracy in responding to existing clients
● Align with the latest International Ethics Standards Board for Accountants (IESBA)
standards
Changes in a Professional Appointment
(COE: Section 210 - Professional Appointment)
1. A professional accountant in public practice, who is asked to replace another professional
accountant in public practice shall determine whether there are any reasons, professional or
otherwise, for not accepting the engagement, such as circumstances that threaten compliance
with the fundamental principles.
2. A professional accountant in public practice shall evaluate the significance of any threats.
Depending on the nature of the engagement, this may require direct communication with the
existing accountant to establish the facts and circumstances regarding the proposed change so
that the professional accountant in public practice can decide whether it would be appropriate
to accept the engagement.
3. Safeguards shall be applied when necessary to eliminate any threats or reduce them to an
acceptable level. Examples of such safeguards include:
● Asking the existing accountant to provide known 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; or
● Obtaining necessary information from other sources.
When the threats cannot be eliminated or reduced to an acceptable level through the application
of safeguards, a professional accountant in public practice shall, unless there is satisfaction as
to necessary facts by other means, decline the engagement.
4. A professional accountant in public practice may be asked to undertake work that is
complementary or additional to the work of the existing accountant. Such circumstances may
give rise to potential threats to professional competence and due care resulting from, for
example, a lack of or incomplete information. Safeguards against such threats include notifying
the existing accountant of the proposed work, which would give the existing accountant the
opportunity to provide any relevant information needed for the proper conduct of the work.
5. An existing accountant is bound by confidentiality. Whether the professional accountant is
permitted or required to discuss the affairs of a client with a proposed accountant will depend
on the nature of the engagement and on:
(a) Whether the client’s permission to do so has been obtained; or
(b) The legal or ethical requirements relating to such communications and disclosure, which
may vary by jurisdiction.
6. A professional accountant in public practice will ordinarily need to obtain the client’s
permission, preferably in writing, to initiate discussion with an existing accountant. Once that
permission is obtained, the existing accountant should comply with relevant legal and other
regulations governing such requests. Where the existing accountant provides information, it
should be provided honestly and unambiguously.
Appendix 1
Appendix 2
Guidance Notes on Notification of Changes of Auditors to the Appropriate Audit Authority
under Sections 522 to 525 of the Companies Act 2006.
Reference list entry:
1. Guidance Notes on Notification of Changes of Auditors (2015) .Retrieved from
https://frc.org.uk/Our-Work/Conduct/Professional-Oversight/Audit/Notification-ofchange-of-auditor/Flow-chart-for-audit-firms.aspx
2. Code of Ethics for Professional Accountants (2015) . Retrieved from
http://app1.hkicpa.org.hk/ebook/HKSA_Members_Handbook_Master/volumeI/COE.
pdf
3. Client acceptance and continuance (2015). Retrieved from
http://jaarverslag.ey.nl/transparency+report/commitment+to+quality/client+acceptanc
e+and+continuance.html
4. PWC (2015) Annual Report. Retrieved from
http://www.pwcannualreport.co.uk/
5. Client Acceptance and Continuance
https://www.ifac.org/system/files/publications/files/client-acceptance-and-conti.pdf
6. Client Acceptance Procedures Best Practices Among Accounting Firms by Kevin
Prendergast
http://www.researchassociatesinc.com/documents/BestPracticesClient.aspx
7. Deloitte LLP and affiliated entities (2014) Deloitte Cyprus Audit Transparency Report
Retrieved from
http://www2.deloitte.com/content/dam/Deloitte/cy/Documents/aboutdeloitte/CY_AboutDeloitte_AuditTransparencyReport2014_Noexp.pdf