Acceptance and continuance of client relationships and engagements

• Apply the quality objectives for acceptance and continuance in QM 10.31
• Gather information on client integrity and the firm’s ability to perform
• Prevent financial and operational priorities from driving acceptance decisions
• Respond when information arises after acceptance that would have caused the firm to decline

The quality objectives

QM 10.31 requires two objectives:

1. Judgments about whether to accept or continue a client relationship or specific engagement are appropriate, based on:
   • information obtained about the nature and circumstances of the engagement and the integrity and ethical values of the client (including management and, when appropriate, those charged with governance), sufficient to support the judgment; and
   • the firm's ability to perform the engagement under professional standards and applicable legal and regulatory requirements.
2. The firm's financial and operational priorities do not lead to inappropriate judgments about acceptance or continuance.

The second objective is new in emphasis. A firm that accepts an audit because it needs the revenue, or continues a client despite red flags because the partner owns the relationship, has a quality risk.

Information to gather

For a new client, obtain:

• the nature of the entity, its industry, ownership and governance;
• background on the owners and key management, including litigation and regulatory history;
• inquiry of the predecessor auditor under AU-C 210, with the client's permission;
• the reason for changing auditors and any disagreements;
• the financial reporting framework and any special reporting requirements (single audit, ERISA, regulator filings); and
• independence clearance against the firm's restricted lists.

For continuance, update the same information annually and add what the firm learned: management's cooperation, unadjusted misstatements, fee collection, and any findings or disagreements.

Ability to perform

Ability means competence, capabilities, time and resources. A firm that has never audited a broker-dealer, a governmental entity or a crypto holder should ask whether it has, or can obtain, the people, the industry knowledge, the specialists and the methodology. Ability also includes timing: accepting a June 30 audit due to a lender in 60 days when the firm is fully booked is an ability question.

Specified responses

QM 10.35d requires policies or procedures for two circumstances:

• the firm becomes aware, after accepting or continuing, of information that would have caused it to decline had it been known earlier; and
• the firm is obligated by law or regulation to accept a client relationship or engagement.

For the first, typical responses include consulting with the quality leader and legal counsel, considering whether withdrawal is possible under law and standards, and communicating with those charged with governance. SAS 146 requires the engagement partner to promptly communicate such information to the firm (SAS 146, paragraph 24).

Engagement-level links

SAS 146 requires the engagement partner to determine that the firm's acceptance and continuance policies were followed and the conclusions are appropriate, and to use information from that process in planning and performing the audit (SAS 146, paragraphs 22 and 23). A risk identified at acceptance, such as an aggressive management team, should show up in the risk assessment.

Common implementation problems

• A checklist completed after fieldwork started.
• Continuance forms that roll forward last year's answers unchanged.
• No documented evaluation of the firm's competence for a new industry.
• Fee or realization pressure documented in emails but not addressed in the decision.

Use the acceptance and continuance form and the acceptance guide for small firms.

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