The audit engagement risk in Maltese statutory audits : an evaluation

Abstract

After the recent global recession, the public started to doubt the credibility of the auditor's work. This has put substantial pressure on the management of the audit firms. When faced with an engagement proposal, the most common reaction is to carry out evaluations, document the identified risks and plan appropriate safeguards where possible. If the risks cannot be mitigated, then that engagement is declined. Engagement evaluation is a related but separate process to client evaluation. The fact that an audit firm accepts a client does not imply that it will carry out all the engagements that the client wants. In this dissertation, the concept of audit engagement risk was analysed from a number of dimensions, mainly: litigation, complex audits, required skills, client expectations, professional reputation, commercial risk, and timing and fee pressures. The key research objectives of this study are to: - evaluate the attitude of auditors towards the audit engagement risk and - determine whether there are differences between the perceptions of the big four, medium sized and small firms regarding the audit engagement risk Semi-structured interviews were conducted with ten local audit practitioners to collect the primary data. The study concludes that even though auditors define risk differently, they all agree on the basic principle that there is some form of engagement risk which needs to be managed appropriately before accepting the audit engagement. This study also concludes that different sized audit firms give different priorities to the various areas of risk. All firms concurred that if they are not competent enough, then they will never accept. However, their opinion on the future conflicts of interest, the consideration whether the audit report will be distributed to third parties and the litigation risk varied with the size of the firm. On the other hand, firms within the same category had different opinions on issues like time pressures, client expectations and the need for an expert. This shows that engagement risk assessment is a very subjective area where what one Risk Management Partner may judge as a very high unacceptable risk, another may consider it as medium risk that can be mitigated with appropriate safeguards.