Client-Acceptance Decisions: Simultaneous Effects of Client Business Risk, Audit Risk, Auditor Business Risk, and Risk Adaptation
Karla M. Johnstone
University of Wisconsin - Madison - Department of Accounting and Information Systems
Auditing: A Journal of Practice and Theory, Vol. 19, No. 1, pp. 1-25, 2000
Little is known about how audit partners make the client-acceptance decision. A model is developed and tested that characterizes the client-acceptance decisions as a process of risk evaluation and risk adaptation. The model proposes that auditors will evaluate client-related risks and use that evaluation to determine if the audit firm will suffer a loss on the engagement via a lack of engagement profitability or future litigation. The model proposes that auditors will adapt to the client-acceptance risks by using 3 strategies: 1. screening clients based on their risk characteristics, 2. screening clients based on the audit firm's risk of loss on the engagement, and 3. more proactively adapting using strategies including adjusting the audit fee, making plans about necessary audit evidence, making plans about personnel assignment, and/or adjusting the amount of data collected during the client-acceptance process. To test the model, an experiment was conducted using 137 highly experienced audit partners as participants. The results show that the partners considered the relationships between client-related risks and used their evaluation of those risks to evaluate the audit firm's risk of loss on the engagement.
Number of Pages in PDF File: 25
Keywords: client acceptance, Risk evaluation, Risk adaptation, Structural equation modeling
Date posted: October 4, 2006
© 2016 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollobot1 in 0.187 seconds