Final answer:
Audit risk is a crucial factor for auditors in determining the extent of audit procedures and whether to accept a client. A lower acceptable audit risk often leads to more elaborate audit procedures and, therefore, could result in higher audit fees. Option D is correct as it acknowledges the auditor's ability to accept a low audit risk engagement but with a potential audit fee adjustment.
Step-by-step explanation:
When dealing with audit risk, we need to consider that audit risk is the risk that an auditor expresses an inappropriate opinion when the financial statements are materially misstated. Here's a look at the options provided:
- A) Audit risk should certainly be a factor when determining if a new client should be accepted. High audit risk could imply more work and a potential for reputation damage if issues are not identified.
- B) Audits with a low acceptable audit risk generally require more detailed work and checks which can increase the effort and time needed. This context usually causes higher audit fees, not lower ones.
- C) If management of a company has a reputation for integrity and is known to take aggressive financial risks, an auditor must evaluate the situation carefully. The auditor might decide to accept the client, but with a modified audit approach to address the risks.
- D) If the auditor concludes that acceptable audit risk is low and the client is still acceptable, it means they can proceed with the engagement. However, an increase in the audit fee may be appropriate to compensate for the additional work required due to the lower risk threshold.
In light of the above discussion, the correct option appears to be D) if the auditor concludes that acceptable audit risk is low, but the client is still acceptable, the auditor may still accept the engagement but increase the audit fee.