ACCA Audit and Assurance (F8) Practice Exam

What aspect should auditors review to mitigate the risk associated with new clients?

1. Company size

2. Client location

3. Management integrity

4. Industry trends

The correct answer is: Management integrity

When auditors consider the risk associated with new clients, evaluating management integrity is crucial. This aspect involves assessing the ethical standards, honesty, and competence of the client’s management team. A lack of integrity can lead to significant risks, including potential fraud or misrepresentation of financial statements, which could ultimately impact the reliability of the audit. Management integrity is particularly important because auditors need to place some level of trust in the information provided by the client. If management has a history of unethical behavior or has been involved in litigation or past financial irregularities, it increases the risk the auditor assumes. By ensuring that they have reliable and honest management, auditors can better mitigate the likelihood of encountering challenges or discrepancies during the audit process. In contrast, while company size, client location, and industry trends can also provide useful insights into the client’s context and potentially influence audit strategies, they do not directly address the foundational trust that auditors need to place in a client's financial reporting. Therefore, evaluating management integrity stands out as a critical factor in reducing overall audit risk when onboarding new clients.