Question

What type of risk are audit firms attempting to mitigate in evaluating new audit clients? Give a few examples of procedures audit firms use before accepting a client?

Answer 1

Audit firms have the greatest risk that is Audit risk.

Audit risk- It is the risk that arises during the audit procedure and due to which, Auditor would not be able to present proper qualified report. When client whose financial statements are being audited, is indulged in material misstatement and due to which, auditor presents unqualified report because he could not deduct material misstatement in the financial statements.

Nowadays audit firms are mitigating audit risk more when evaluating new clients.

Apart from Audit risk, audit firms also want to mitigate:

• Accounting principles and standards- Few companies may not maintain financial records and reporting as per the accounting standards and GAAP.
• Internal control system- Audit firms may be worried about internal control system of the clients, if there is poor internal control system, there are more chances of accounting loopholes and forgery.

Procedures audit firms use before accepting a client- Audit firm will review why a company wants a new audit firm? Is it because it had conflict with the older audit firm, if yes then what is the conflict? Financial ratings and public records should be seen before accepting a client. Audit firm should see the annual report, credit report, legal history, litigation record, bankruptcy issue of the client