Most accounting firms do a fine job of thinking about and documenting the initial client acceptance. But after the first year, the continuance decision and related documentation are sometimes forgotten or ignored. Why?
The CPA may think the continuance decision is one those “management by exception” things–only to be thought about when apparent issues arise.
However, independence threats sometimes arise subtly. For example, what if a partners’ spouse invests in an audit client? Or maybe a staff member becomes a board member of a nonprofit audit client and he doesn’t tell anyone.
Also, problems can also arise on the client-side. Have they paid last year’s audit fees? Has the client engaged in any unethical activities? Some actions may cause you to question their integrity.
The time to discover changing engagement dynamics is before the engagement letter is signed. We certainly don’t want to near the end of an audit and realize we are not independent.
Need another reason to document the continuance decision? Think about peer review.
AICPA peer review checklists focus on independence documentation–whether an acceptance or continuance decision is made. So, if for no other reason, we need to consider and document the continuance decision to be safe in peer review.
While you are documenting continuance, summarize the nonattest services being performed and the client personnel that will oversee and assume responsibility for those services. Potential independence issues can arise from changes in client personnel. If a key accounting person leaves the employ of your attest client, is there a replacement with sufficient skill, knowledge, and experience to assume responsibility for the financial statements (if you create them)?
Now would be a good time to sample a few of your files to see if they contain requisite acceptance or continuance documentation. Such documentation is necessary for the following types of engagements:
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Charles Hall is a practicing CPA and Certified Fraud Examiner. For the last thirty years, he has primarily audited governments, nonprofits, and small businesses.He is the author of The Little Book of Local Government Fraud Prevention and Preparation of Financial Statements & Compilation Engagements. He frequently speaks at continuing education events.Charles is the quality control partner for McNair, McLemore, Middlebrooks & Co. where he provides daily audit and accounting assistance to over 65 CPAs. In addition, he consults with other CPA firms, assisting them with auditing and accounting issues.
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