External audit client continuance : an analysis

Abstract

The first objective of the study is to identify the client continuance policies and procedures adopted by Maltese auditors, and the factors considered in evaluating the continuance of the client relationship. The second objective of the study is to identify the risk management strategies adopted by Maltese auditors to handle or mitigate the risks associated with higher risk clients, and assess circumstances which may lead to the termination of the client relationship and ultimately the auditor's resignation. Various sources of literature pertinent to the study were collected and reviewed; on which basis the interview questions were designed. In-depth, semi-structured personal interviews were carried out with the RMPs of the all the BFAFs, ten non-BFAFs, and seven SPs. The data collected was mainly of a qualitative nature, with some quantitative on which statistical inference was applied. The findings indicate that generally all three types of audit practice adopt some form of client continuance policies and procedures, nevertheless significant differences exist in terms of the level of sophistication and management thereof. The BFAFs adopt more formal and structured approaches, along with a more detailed documentation of client continuance decisions, whereas SPs adopt less structured approaches. In line with foreign literature, the client's character and integrity was rated as the most important factor to consider in the continuance of client relationships. This was followed by independence and relationship issues, professional competence, and management's commitment to internal control, laws and regulations and the quality of the auditor-client relationship. The least important categories of items to consider were factors pertaining to the client's financial The findings indicate a risk-based framework, where risk is managed at both the financial statement level and at the assertion level in relation to classes of transactions, account balances and disclosures. Significant problems were found in relation to SPs, where limited resources often restrict their ability to manage risk, other than through the use of conventional risk management strategies. With respect to the termination of client relationships, all facts led to the conclusion that auditor resignation is not a common occurrence in practice. The aim of this study was to identify the client continuance process adopted by Maltese auditors. Possible weaknesses were identified and recommendations were put forward.