The audit function creates several important relationships among the various parties. One of the significant and potentially problematic relationships is between the audit firm and the audit client. 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. 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. 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. 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. 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.
Ethridge, Jack R.; Marsh, Treba; and Revelt, Bonnie, "Engagement Risk: Perceptions And Strategies From Audit Partners" (2007). Faculty Publications. 28.