Question

Black & White CPA's (B&W) are looking to grow. To expand its client base, it has developed an advertising strategy where it guarantees that all audits will be completed within 10 business days. In addition, B&W has offered all new assurance clients free bookkeeping for the first year of the engagement. B&W believes that time spent on the audit will be reduced if the firm produces the financial statements. The firm is also looking to reduce staff time spent on audits and so it has advised staff not to update the engagement letters of existing clients because the letters do not change much. One of B&W's long time clients has proposed that this year's audit fee should be based on a percentage of their final pre-tax profit. The partners are excited about this option as they believe it will increase the overall audit fee. B&W has recently obtained a new audit client, Clover Co (Clover), whose year end is March 31. Clover requires their audit to be completed by the end of April; B&W plans to use mostly junior staff on this audit, because it is their busy season and they do not have any senior staff available during that time. In order to save time and cost, Black & White have not contacted Clover's previous auditors.

Required:

1.Describe the steps that Black & White should take in relation to Clover: (i) Prior to accepting the audit. (ii) To confirm whether the preconditions for the audit are in place

2. State FOUR matters that should be included within an audit engagement letter.

3.(i) Identify and explain FIVE ethical risks which arise from the above actions of Black & White & Co; and (ii) For each ethical risk explain the steps which Black & White & Co should adopt to reduce the risks arising.

Answer 1

(1) (i)
The steps that Black & White should have been taken before accepting the audit of Clover Co are:
(a)
Black and White must determine whether the audit acceptance will pose any risk to conformity with the basic principles. A private interaction between a partner at the client and a senior leader of the workforce of the client may present a challenge to objective reporting. Lack of technical knowledge may pose a challenge to professional integrity and due care.
(b)
The firm shall make sure that personnel is ready to handle the audit assignment, also it must ensure that appropriate personnel is available when needed. Thus, it would create a challenge to professional competence and care if adequate expertise were not available.
(c)
And the most important aspect is the Client Screening, where the references shall be taken from the client and its directors, whether they are already in touch with the proposed auditors.

(1) (ii)
The preconditions for an audit is the acknowledgment by the management of its responsibility for the preparation of the financial statement as per the FRF. And internal control is to ensure that the financial statement is free from fraud and error. The management shall provide the auditor with access to all records, any supplementary information, and, if necessary, unlimited access to individuals.

In the case of firm, Black & White did not follow any such steps as mentioned in preconditions for an audit. Hence it is being said that the preconditions are not in place.

(2)
The matters that should be included in the audit engagement letter are:
(a) The objective and scope of the audit of the financial statements
(b) The responsibilities of management
(c) The responsibilities of the auditor
(d) Identification of the applicable financial reporting framework
(e) The reference as such about the format and content of the reports to be issued by the auditor and any such explanatory statement about any such situations where the content of the report may differ from the original one.


(3)
The identification of the Ethical Risks that would arise because of the actions taken by Black and White & Co and their corresponding steps to reduce those risks are shown below:

S. No.	Ethical Risks	Steps to reduce the Risk
1)	Black and White & Co have ensured that their audit would not last more than 10 days in order to minimize the disruption to businesses. Black and White & Co should discourage the advertising campaign immediately since it does not conform with the code of ethical conduct and behavior. Each audit task is different and would thus take a different amount of time. Where complex audits can not possibly be carried out within 10 days, as the team will not be able to do so, as they have to collect adequate and relevant audit information at this point, hurry in the process would lead to an inappropriate opinion.	Black and White & Co should bring an end to this promotional strategy. immediately because it does not conform with the Code of Ethical conduct and behavior. In any prospective clients who may have consulted Black and White & Co as a result of this advertising, Black and White & Co may advise them that the length of the audit would be dependent on the extent of audit risk present, which may be considerably longer than 10 days.
2)	Black and White & Co gave all new audit clients free of charge bookkeeping service for the first year of engagement. Although Black and White & Co are in a position to plan accounts for unlisted Organizations, which raises the possibility of self-examination since the audit team might examine their own job.	In order to follow the engagements, where Black and White & Co are to prepare accounts of the client, they must ensure how this bookkeeping service is carried out by the team which is different from the audit team.
3)	In order to make a profit on the overall engagement that Black and White & Co may considerably decrease the procedures for the audit engagement. The firm would not amend the letter of engagement for current customers on the grounds that they do not change it on annual basis, this decision is not in conformity with the terms of the audit engagement as explained in ISA 210. Even though the letter of engagement has not changed, it still shall be checked to make sure that they are valid and up-to-date.	Black and White & Co should ensure that all audit engagement is carried out in compliance with international auditing standards. Black and White & Co are expected to comply completely with ISA 210 and check the need to update the engagement letters on a yearly basis.
4)	The ongoing Black and White & Co client offered an audit fee calculated as a percentage of the total profit before tax.	Black and White & Co should respectfully reject the proposal of contingent fee structure as it would be a violation of the code of ethical conduct and behavior. Conversely, the firm should inform the client that the audit fees would be dependent on the level of the research needed to obtain sufficient and appropriate audit evidence.
5)	Black and White & Co are planning to use junior staff to audit their new client Clover Co (Clover) because the duration of the audit is that when the senior member of the firm is engaged with another client.	The staffing at the client Clover Co (Clover) should be checked by Black and White & Co and make improvements to increase the number of the experienced team members. But if it is not feasible, then it has to be discussed with the directors of Clover Co (Clover) whether the timing of the audit may be pushed to a point where the company has the availability of the sufficient experienced members.