Final answer:
The auditor should consider the client's refusal to allow contact with the existing auditor as a negative indicator of the management's integrity and may decide to decline the audit engagement based on risk assessment.
Step-by-step explanation:
If a prospective new audit client does not allow the auditor to contact its existing auditor, the correct approach would be option 2: Consider it a negative factor on the integrity of client management. According to auditing standards, communication between the successor and predecessor auditors is an important part of the client acceptance process. This communication helps the incoming auditor understand issues related to financial statements and any reasons why the client and the predecessor auditor are parting ways.
It is a red flag if a client does not permit this contact. If a client refuses, the potential new auditor should thoroughly consider the implications this has for the integrity of the client's management and the risks involved in accepting the engagement. They might decide to decline the engagement based on the risk assessment. It is not appropriate to violate the client's request, which would be a breach of confidentiality. Likewise, it is not the responsibility of the existing auditor to initiate contact with the new auditor (option 3), and respecting the client's right to privacy (option 4) does not adequately address the potential risks posed by the client's refusal.