Audit Client Acceptance Procedures

by Laura Acevedo; Updated September 26, 2017

Auditing is a time-sensitive and risk-intensive business. Financial controversy and fraud has raised the bar on auditing firm diligence. A critical step in an auditing firm establishing strong credentials and minimizing risk is obtaining clients that are dependable, financially secure and present a low risk for fraud. The most successful audit client acceptance procedures reduce legal and financial risk by accepting only companies with strong operating and financial track records.

Prior Audit Review

Review the reasons why a company is looking for a new auditor. It may be the company is performing due diligence and looking for a lower cost option for audit reviews, or the company may be a new firm that has just increased revenues to the point where it needs an audit. Likewise, a company may be looking for a new firm because it has run into conflicts with prior auditors. Conflicts could include audit procedures the company did not like or payment problems. A former auditing firm may have dropped the company for failing to comply with audit requests or for routine late payments. As an auditing firm, you should decide how much risk you are willing to take with a company that has an unreliable auditing past.

Ratings and Public Records

The financial ratings and public records of a company should be reviewed before an audit client is accepted. Review credit reports, legal history, tax problems, litigation records, regulatory actions, bankruptcy issues, consumer complaints and professional liability claims. Require the company to provide business references for review. A solid review of a company’s professional and public dealings will provide good insight into the stability and functioning of the company.

Reputation

Your reputation as an auditing firm is partly based off the companies you audit. Ensure the image of your auditing firm by only accepting clients who share the same ethical and business integrity foundation as your firm. Interview senior management and executives to gain an understanding of their business principles. Look into the background of the key players in the business for any criminal or legal problems and at their personal reputation in the business community. Determine if the company pays their bills on time and honors contracts and agreements. Avoid any client that has a long history of litigations as a defendant or as a plaintiff.

Business Structure

Review the business structure of a potential client. Look for red flags such as overseas plants or operating facilities, high turnover in upper management and a short operating history. Also review the company’s legal counsel to see if they a have stable, well-known legal firm, or unknown or shady representation. Review the company’s physical business presence. How long a business has stayed in the same location is an indication of stability.