Question

A utilities company is looking for a new auditor. The company has grown through an acquisition and needs an auditor that can handle its needs. The company has paid attention to good internal controls, and the new auditor sees no independence issues. Discussions with the predecessor auditor, the audit committee, and management provide a consistent story about the company and its reasons for changing auditors. Which of the following is a negative factor suggesting the auditor may want to refuse this company as a new audit client?

1) The company is in a heavily regulated industry.
2) The company has grown through acquisition.
3) The company cares about good internal controls.
4) The auditor sees no independence issues.

Answer 1

None of the options provided indicate an immediate negative factor for refusing the audit client, as strong internal controls, no independence issues, and consistent information are all positive indicators.

Step-by-step explanation:

The scenario presented does not indicate any strong negative factors that would suggest the auditor should refuse the company as a new audit client. A company in a heavily regulated industry may present challenges, but this in itself is not necessarily a negative factor; rather, it could imply that the company requires an auditor who is familiar with the complexities of the industry's regulations. The fact that the company has grown through acquisition can present risks associated with integrating new operations, but if the company maintains good internal controls, this is a positive sign. A lack of independence issues is also a positive factor. Since information from the predecessor auditor, the audit committee, and management is consistent, there appears to be no immediate red flag suggesting the new auditor should refuse the engagement.