CPA Exam — AUDEthics, Professional Responsibilities, and General PrinciplesMedium
A CPA firm is considering accepting a new audit engagement for a publicly traded company. During the client acceptance phase, the firm identifies a significant dispute between the prospective client and its previous auditors regarding the application of generally accepted accounting principles. Which of the following actions is most appropriate for the CPA firm to take in this situation?
- ACommunicate with the predecessor auditor to understand the nature and resolution of the dispute.
- BAccept the engagement but require the client to resolve the dispute before starting fieldwork.
- CProceed with the engagement, focusing on the current year's financial statements only.
- DDecline the engagement immediately due to the high risk of litigation.
Show answer & explanationAnswer & explanation
Correct answer: A. Communicate with the predecessor auditor to understand the nature and resolution of the dispute.
Communicating with the predecessor auditor is a crucial step in the client acceptance process, especially when significant disputes are identified. This communication provides valuable insights into potential risks and accounting issues that could affect the current audit.
Why the other options are wrong
- B. Requiring resolution before starting fieldwork might not be feasible and doesn't replace the need to understand the prior dispute from the predecessor's perspective.
- C. Ignoring prior disputes and focusing only on the current year would be a failure of due diligence and could lead to significant audit risks.
- D. Declining immediately might be premature without gathering more information from the predecessor auditor.
Predecessor Auditor Communication
Before accepting a new audit engagement, a prospective auditor must communicate with the predecessor auditor to inquire about matters that may bear on the integrity of management, disagreements with management, and reasons for the change of auditors.
- Required by professional standards.
- Requires client permission.
- Provides crucial information for engagement acceptance decisions.
Memory trick: New clients need a thorough check, before you sign on the dotted speck.