How to Research a New Auditing Client
Here’s something every auditor should remember: Just because a client comes to you and wants you to audit its financial statements, you don’t have to accept the engagement. After all, you’re not selling shirts in a department store; you’re expressing an opinion on the fairness of the financial statements under audit. Individual and business financial decisions hinge on your audit report — decisions ranging from whether an individual invests in the business to whether a vendor extends your client credit.
The onus is on you to make sure you can provide a client with a quality audit before you even get started. Fully understanding your duties and responsibilities during the audit is key. One of your first duties is to make sure the client’s financial statements and reporting systems give you the info you need so that you have reasonable assurance that the financial statements are free from material misstatement. You also have to evaluate the possibility of your firm’s reputation being tarnished through association with the potential audit client.
When accepting new clients, look to SAS No. 108, “Planning and Supervision.” If your client is new, this SAS addresses special procedures that should take place before you agree to work with the client.
The process of researching a new client can be pretty involved. You should gather as much information about the business and its environment as possible. Here’s how.
Meet with the client.
The topics you discuss at the initial interview vary based on how well you know the potential client. Certainly, you discuss what services the client requires and how or whether your firm can fulfill these goals. You also need to find out whether the potential client has been audited in the past and, if so, who conducted the audit. Ask whether the client is interviewing other CPA firms for the job.
Review existing records.
It’s a good idea to look at interim financial statements and prior years’ tax returns. Doing so gives you an idea whether the financial records can be audited and whether management is committed to sound accounting principles.
Assess whether the client can be audited.
The condition of the financial statements offers clues as to their auditability. Sometimes you can just look at the financial statements and realize they’re a mess, which affects their auditability.
One example would be if the accounts carry a balance opposite to their normal balance. Case in point: Cash should never be shown as a negative balance on the balance sheet. But what if there really was an overdraft? Although shoddy bookkeeping, lax cash controls, check kiting, or other problems may allow this to happen, a business should never reflect a negative cash balance on its balance sheet (whatever event caused the negative balance should be corrected by a journal entry). That fact alone may cause you to decline taking on the client because it indicates a critical breakdown in client controls at best and fraud at worst.
Potential clients can also be rendered unauditable through no fault of their own. Maybe their records were destroyed in a fire or flood. You must always query the potential client as to the availability of records.
Interview the prior auditor.
If the potential client severed relations with its old CPA firm, you must get the client’s permission to talk to the previous auditor to get the scoop on any problems that the auditing firm may have encountered with client integrity, disagreements about how the audit should be conducted, application of generally accepted accounting principles, or lax internal controls. Your authoritative source for interviewing the old auditor is SAS No. 84, “Communications between Predecessor and Successor Auditors.”
You want to avoid clients that opinion shop like the plague. What does that mean? The client wasn’t happy with the old auditor’s report, so it switches audit teams to see whether it can get a more favorable report from an auditor that’s not as familiar with the company. If the client won’t give you permission to speak with the old auditor, your firm may not want to accept the engagement.
If your potential client’s most recently audited financial statements are more than two years old, it’s not mandatory per SAS No. 84 to contact the previous auditor when researching your potential client.