Client Acceptance in Auditing: Hi-Tech Software & Games Analysis

This case study delves into the critical process of client acceptance within the context of auditing, specifically focusing on Hi-Tech Software & Games Inc., a company considering going public. It explores the necessary due diligence steps an audit firm must undertake before agreeing to an engagement, including understanding the company's environment, inspecting records and assets, and making inquiries to assess potential risks. The study also addresses the ethical considerations and professional standards, such as those outlined by the IFAC and ISA 220, that guide auditor behavior in evaluating a prospective client's integrity and reputation. The analysis considers past financial difficulties, like bankruptcies, and their impact on the auditor's decision, emphasizing the importance of thorough investigation and risk mitigation. Desklib offers a wealth of resources, including similar case studies and solved assignments, to aid students in mastering auditing and accounting principles.

Running head: AUDITING AND ACCOUNTING
Auditing and Accounting
Name of the Student
Name of the University
Author Note

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Table of Contents
Introduction......................................................................................................................................3
Discussion........................................................................................................................................3
Answer A.....................................................................................................................................3
Answer B.....................................................................................................................................4
Answer C.....................................................................................................................................5
Conclusion.......................................................................................................................................5
References........................................................................................................................................6

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Introduction
Auditing is the process of investigation and examination of the financial statements of
organizations to make sure that the records are true and fair (William, Glover and Prawitt 2016).
The auditor assures that the statements are accurate and free from any kind of frauds and errors
and submits the audit report.
In the given case, the president of a hi-tech software and games company has appointed
the auditor to get its accounts checked. The company is a private company with $500 million
shares and $200 million assets is willing to go public and raise capital of $25 million through
issue of shares. The discussion deals with whether the audit firm will take up the audit of the
company or not after investigating into details.
Discussion
Answer A
The firm before performing the audit for its client must go through certain sources to obtain
informations of the company, which are as follows:
 Understanding the company environment: the firm should primarily understand the
various regulations and policies of the company. They should also go investigate into the
entity rights and obligations and analyze their procedure of performance.
 Inspections of records and documents: Inspection includes examination of the records
and documents both internal and external. The documents may be in paper form or may
be in electronic form. This helps in understanding the reliability and nature of the

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activities (Hayes, Wallage and Gortemaker 2014). The previous audit reports to
understand the various financial activities are also to be examined.
 Inspecting the tangible assets: This inspection refers to the physical inspection of the
assets, this provide appropriate evidences about the existence of the same. The inventory
and the asset valuation process are also analyzed beforehand.
 Observations: The partners of the firm should understand the environment of the
company, which includes the internal control risks, misstatements in the statements. The
management and the working of the company are also to be investigated properly.
The inquiries the audit firm makes to confirm the audit:
The inquiry is the process of getting knowledge from the individuals related to the entity. The
inquiry consists of both financial and non-financial question and may take place in both oral and
written form. It includes obtaining information regarding the knowledge, experiences,
qualifications and responsibilities of the individuals to be questioned. All sorts of feedback
regarding the performance and activities of the company are taken in consideration. Information
regarding innovation and changes are noted in details.
Answer B
According to international federation of accounts (IFAC) code of ethics for professional
accounting, a certified public accountant before accepting a new client must investigate in details
the ownership, the management and the finance of the company (Kang, Trotman and Trotman
2015). This helps the audit firm to determine whether the acceptance would create any threats to
the firm. To reduce the firm’s risk, the International Standard for Auditing (ISA) 220, also
mentions clearly about this procedure of investigation (Simunic, Ye and Zhang 2017). This

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standard emphasizes that it is the responsibility of the firm to be aware of the integrity and the
reputations of its client’s management.
Answer C
The partner in charge of the audit practice must not accept the client taking in
consideration the previous reputation. According to the International Standard for Auditing, it is
the responsibility of the audit firm to verify the previous activities to reduce the risks involved in
the auditing.
When issues arise out of any fraudulent practices as it is in the given case the firm must
conduct appropriate consultations with the third party or the client before submitting the
engagement letter. It is to be ensured that record resolution regarding the issue must be present in
the audit file. However, given issue of fraud has taken place ten years back, therefore it depends
on the objectives and policy of the audit firm regarding the selection decision.
Conclusion
The audit firm must thoroughly go through the various financial and non-financial
activities of the business before accepting the audit performance. There are various risk involved
in the selection of the clients. Thus, according to the standard it is mandatory to investigate in
details the company environment.

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References
Hayes, R., Wallage, P. and Gortemaker, H., 2014. Principles of auditing: an introduction to
international standards on auditing. Pearson Higher Ed.
Kang, Y.J., Trotman, A.J. and Trotman, K.T., 2015. The effect of an Audit Judgment Rule on
audit committee members’ professional skepticism: The case of accounting
estimates. Accounting, Organizations and Society, 46, pp.59-76.
Simunic, D.A., Ye, M. and Zhang, P., 2017. The joint effects of multiple legal system
characteristics on auditing standards and auditor behavior. Contemporary Accounting
Research, 34(1), pp.7-38.
William Jr, M., Glover, S. and Prawitt, D., 2016. Auditing and assurance services: A systematic
approach. McGraw-Hill Education.