Analysis of

Potential Audit
Client

Why do we
need to analyze
potential audit
client?

ACCEPT

NOT
ACCEPT

5 Factors to be Consider
When Accepting Audit
Engagement
1. Management Integrity
2. Relationship

of the Management with the

Other Industry
3. Association of the Audit Firm with the
Client
4. Competence of the Auditor
5. Fees to be Charged

Management Integrity
Can the CPA rely on the management of the
prospective
client
to
provide
meaningful
representation and disclosure?
At first, YES. The CPA can
rely on the management of
the prospective client but
there is still need for
further investigation to
make sure that the
management has
INTEGRITY.

Integrity
110.1 The principle of integrity
imposes an obligation on all
professional accountants to be
straightforward and honest in
professional and business
relationships. Integrity also implies
fair dealing and truthfulness.
- COE Sec 110

COE Sec. 210. 16

210.16 A professional accountant in public practice will
ordinarily need to obtain the clients 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. If the proposed accountant is unable to
communicate with the existing accountant, the proposed
accountant should try to obtain information about any possible
threats by other means such as through inquiries of third parties
or background investigations on senior management or those
charged with governance of the client.

Relationship of the Management

with Other Industry
What is the relationship of the prospective client with
the current and former lawyers and bankers and with
the predecessor auditor?
We need to identify the relationship
of the prospective client to the
current and former lawyers and
banks and with predecessor auditor
in order to help us assess the
acceptance of the audit client.

The lawyer of the

company ensures that
the organization has
complied with the
rules and regulation
set by the government
or by the higher
authority.
Communicating with
the lawyer of the audit
client can provide us
information whether
the entity are involved
with any illegal acts or
not.

Audit client transacts

with their banks
regularly. They place
their money on it, they
have credit to it and
they even invest on it.
So, communicating
with the audit clients
bank can help us
measure the credibility
of the company.

The predecessor auditor

has obtained the
knowledge that we the
current auditor is
currently obtaining, so
communicating with
them can provide us
understanding as to the
reasons for the change of
auditors , the
disagreement between
the predecessor auditor
and the client and any
facts that have bearing
on the integrity of the
prospective clients

Association of the Audit Firm with

the Client
What is the risk to the CPA of being associated with the
client particularly as regards professional reputation and
profitability?
Engagement Risk
- the economic risk that the CPA
firm is exposed to simply because it is
associated with a particular client
including loss of reputation, inability
of the client to pay the auditor, or
financial loss because management is
not honest and inhibits the audit
process. Engagement risk is controlled
by careful selection and retention of
client.

Two Associated Loss of

Engagement Risk

Competence of the Auditor

Does the CPA possess the technical competence to perform the
necessary service for the prospective client particularly when the
functional and industry specialization is a factor?
Professional Competence and Due Care
130.1 The principle of professional competence and
due care imposes the following obligations on
professional accountants:
(a) To maintain professional knowledge and skill at
the level required to ensure that clients or employers
receive competent professional service; and
(b) To act diligently in accordance with applicable
technical and professional standards when providing
professional services.
- COE Sec. 130.1

Fees to be Charged
Is the fee to be charged reasonable given the level of risk
assumed and is the prospective client capable of paying?
Fees charged for engagements should be a fair
reflection of the value of the work involved and should
take into account, among others:
(a) the skill and knowledge required for the type of work
involved;
(b) the level of training and experience of the persons
necessarily engaged on the work;
(c) the time necessarily occupied by each person
engaged on the work; and
(d) the degree of responsibility and urgency that the
work entails.
- COE Sec. 240.2