Engagement Risk: Perceptions And Strategies From Audit Partners

Abstract

<p class="MsoNormal" style="text-align: justify; margin: 0in 34.2pt 0pt 0.5in;"><span style="font-size: 10pt;"><span style="font-family: Times New Roman;">The audit function creates several important relationships among the various parties.<span style="mso-spacerun: yes;">  </span>One of the significant and potentially problematic relationships is between the audit firm and the audit client.<span style="mso-spacerun: yes;">  </span>The decision by the audit firm to accept or retain a client is crucial because of the potential risk of being associated with certain clients. The potential damage can range from financial loss and/or loss of prestige to the ultimate demise of the audit firm.<span style="mso-spacerun: yes;">  </span>Engagement risk is considered to be composed of three components: entity’s business risk, audit risk, and auditor’s business risk. This research questioned whether audit firms have significantly changed their views regarding engagement risk and how they evaluate and manage this risk.<span style="mso-spacerun: yes;">  </span>An analysis of the surveys revealed that 83% of the respondents believed their views regarding the importance of engagement risk have changed, but only to a moderate degree.<span style="mso-spacerun: yes;">  </span>In evaluating engagement risk, audit partners considered management integrity in general, management integrity toward fraud, and the presence of the elements of the fraud triangle to be the most important factors. Assignment of more experienced audit staff and increased substantive tests of account balances were the most frequently used mitigating strategies.<span style="mso-spacerun: yes;">  </span>Based upon these results, which were consistent with our previous study, it appears there have not been significant changes in audit partners’ views regarding the importance of the client acceptance/retention decision.<span style="mso-spacerun: yes;">  </span><span style="mso-spacerun: yes;"> </span></span></span></p>

The cost of sin: The effect of social norms on audit pricing

“…These industries' peculiarities and adversities related to broader social conditions are an integral part of the client's business risk, which is an essential component of an auditing firm's engagement risk 1 assessment process (Bedard, Deis, Curtis & Jenkins, 2008;Colbert, Luehlfing & Alderman, 1996;Ethridge, Marsh & Revelt, 2007;Kerr, Grupe, Jooste & Vreeland, 2007;Venuti, Holtzman & Basile, 2002). In particular, the propensity of the client for litigation, controversies and the reputational effects from the association of the audit firm with particular industries and clients, leads to a higher assessment of audit risk (Colbert et al, 1996;also SAS No.…”

The impact of labor unionization on monitoring costs

“…In assessing audit risk, auditors consider the complexity of the corporate context (Fung, et al, 2017). Auditing standards, guidelines and professional writings prescribe that an auditor's engagement decision should be based upon a thorough assessment of the client, which is termed "engagement risk" (Bedard, Deis, Curtis, & Jenkins, 2008;Danziger, 1999;Ethridge, Marsh, & Revelt, 2007;Kerr, Grupe, Jooste, & Vreeland, 2007;Thomas, 1992; see also SAS No. 109, AU Sect.…”

Managing Risk in a Poor Economy: The Association between Economic Conditions and Risk Tolerance and Its Implications for Practice

“…1. Assign more experienced staff (Perry 2011;D'Aquila, Capriotti, Boylan, and O'Keefe 2010;Ethridge, Marsh, and Revelt 2007) and be sure they know what they are doing. The highest-quality work will come from a team with more experience and knowledge.…”

“…4. Change up the audit by forgoing standard approaches and adding an element of unpredictability (Perry 2011;D'Aquila et al 2010;Ethridge et al 2007). Avoid using a standard approach to an audit when dealing with higher-risk clients.…”