Abstract

http://ssrn.com/abstract=934191
 
 

Citations (28)



 


 



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

Abstract:     
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

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Date posted: October 4, 2006  

Suggested Citation

Johnstone, Karla M., Client-Acceptance Decisions: Simultaneous Effects of Client Business Risk, Audit Risk, Auditor Business Risk, and Risk Adaptation. Auditing: A Journal of Practice and Theory, Vol. 19, No. 1, pp. 1-25, 2000. Available at SSRN: http://ssrn.com/abstract=934191

Contact Information

Karla M. Johnstone (Contact Author)
University of Wisconsin - Madison - Department of Accounting and Information Systems ( email )
School of Business
975 University Avenue
Madison, WI 53706
United States
608-234-1052 (Phone)
608-265-5031 (Fax)
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