Reflection Paper

Rood Notes

• Establishing sound client acceptance procedures can lead to better liability risk management and can contribute to a firm’s sustainable growth/long-term profitability
• Basic Steps for all clients and engagements

• Evaluate prospective client integrity

• Personally meet the client
• Reference the client/obtain credit history

• Perform engagements with professional competence

• Consider whether:

• The service can be performed by the firm
• The engagement is consistent with the firm’s vision or business plan
• The firm has enough resources to meet the needs of the client

• Consider risks related to the particular engagement

• Higher-risk engagements

• The firm should consider:

• Performing a background check of key member’s within the client’s company
• Review the entity’s public records
• Interview selected employees
• Perform a detailed review of previous financial statements

• Including reasons for any delays in issuance or restatements

• History of changes in CPA firms.
• Perform a detailed review of previous tax returns, audit results, and other tax issues

• Formalize the process

• Firm should develop a checklist to document decision-making
• If the firm is larger, then there may be an establishment of a new client acceptance committee
• Firms should develop a client prototype

• This can be used to compare a prospective client and determine if they are a good fit for the firm

• Lastly, an engagement letter should be drafted and then reviewed by the acceptance committee before being sent to the client

• Continuing clients

• If a client continues to use the firm’s services, then they should be evaluated annually to track any changes in upper level management or financial environment.

Eilifsen & Messier

• Examined the materiality guidance for 8 of the largest US public accounting firms.
• Results:

• A high level of consistency in terms of quantitative benchmarks to determine overall materiality

• Income before taxes, total assets or revenues, and total equity

• Differences were found in how the firms consider the possibility of undetected misstatements when evaluating detected misstatements.
• The material guidance was analyzed by coding the data along six research questions

• Then each firm reviewed the coding for accuracy and completeness.

• Overall

• Question 1-4 deal with the basi application of materiality on an audit for planning purposes and there was a significant amount of agreement between the firms on benchmarks and percentages applied to the benchmarks when establishing materiality.
• There was substantial agreement between the firms on how to determine tolerable misstatement

• Most firms use a 50-75% range.

• There is also agreement on what constitutes a trivial misstatement

• 3-5% of overall materiality

• The results show that the firms require the following:

• All misstatements that are not clearly trivial should be posted to a summary of unadjusted misstatements and management is requested to correct all accumulated misstatements.
• All misstatements for public companies are evaluated using the dual method and there is some variability in how to handle such misstatements for nonpublic companies.
• All of the firms provide guidance for offsetting detected misstatements.
• Qualitative factors are to be considered in determining the materiality of uncorrected misstatements.
• There are differences in the firms’ guidance when evaluating uncorrected misstatements and considering the possibility of additional undetected misstatements.
• Material misstatements detected during the audit should be brought to management’s attention immediately.

• The results show that the firms’ guidance closely follows existing auditing standards in relation to how the firms handle materiality in group audits.

Messier (Analytical procedures)

• K

Gendron (Canadian client-acceptance decision-making)

• K

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