（2000）Client-acceptance decisions：Simultaneous effects of client business risk, audit risk, auditor business risk, and risk adaptation.pdfVIP

Auditing: A Journal of Practice Theory Vol . 19, No . 1 spring 2000 Client-Acceptance Decisions: Simultaneous Effects of Client Business Risk, Audit Risk, Auditor Business Risk, and Risk Adaptation Karia M. Johnstone SUMMARY Little is known about how audit partners make the client-acceptance decision . In this paper, a model is developed and tested that characterizes the client-acceptance decision as a process of risk evaluation and risk adaptation . The model proposes that auditors will evaluate client-related risks {e.g. , financial viability, and internal control) and use that evaluation to determine if the audit firm will suffer a loss on the engagement via a lack of engagement profitability or future litigation. The model proposes that audi- tors will adapt to the client-acceptance risks by using three strategies : (1) screening clients based on their risk characteristics; (2) screening clients based on the audit firms risk of loss on the engagement; and (3) more proactively adapting using strategies including adjusting the audit fee , making plans about necessary audit evidence, making plans about personnel assignment, and/or adjusting the amount of data collected during the client-acceptance process . To test the model, an experiment was conducted using 137 highly experienced audit partners as participants . The results show that the partners considered the rela- tionships between client-related risks and used their evaluation of those risks to evalu- ate the audit firms risk cf loss on the engagement . In terms of risk ada