|
ACTIV- ITIES |
STAGES | ||||
|---|---|---|---|---|---|
| CA/R | AP | CT | ST | OF | |
| PL | SP | TP | OP | OP | OP |
| EG | PK | DK | EofO | EofM | CFS |
| EE | AR1 | DR*2 | DR*3 | AR4 | AR5 |
| DM | A/R | AA | CR? | CAB | AO |
During every audit stage, auditors undertake certain decision making activities. In the client acceptance/ retention stage, auditors compare the acceptable audit risk AR*1 with the achievable audit risk AR1 at the financial statement level to assist in making the accept/ retain decision. If AR1 is less than or equal to AR*1 (in other words, if the auditor can achieve a level of risk that is acceptable), the auditor may accept/ retain the entity, otherwise the auditor rejects/ relinquishes the entity as a client. For example, if AR*1 is evaluated as VERY LOW and AR1 as LOW, then, assuming there are no mitigating factors, the auditor does not accept the entity as a client because the acceptable audit risk (VERY LOW) cannot be achieved. In practice, auditors may not always apply this aspect of audit risk theory [fn].
Other factors that auditors consider include whether a scope limitation is known to exist, possible violation of legal statutes or professional standards, political consequences of the appointment, return on the audit firm's investment, and the potential of the (prospective) client to generate future income for the audit firm.
Where the decision is to accept a new client, the auditor confirms the terms of the engagement, in writing, by sending the new client what is referred to as an engagement letter.
This completes this audit stage and indicates that tactical planning in the audit planning stage may now commence.
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