Salt & Pepper & Co (Salt & Pepper) is a firm of Chartered Certified Accountants which has seen its revenue decline steadily over the past few years. The firm is looking to increase its revenue and client base and so has developed a new advertising strategy where it has guaranteed that its audits will minimise disruption to companies as they will not last longer than two weeks. In addition, Salt & Pepper has offered all new audit clients a free accounts preparation service for the first year of the engagement, as it is believed that time spent on the audit will be reduced if the firm has produced the financial statements. The firm is seeking to reduce audit costs and has therefore decided not to update the engagement letters of existing clients, on the basis that these letters do not tend to change much on a yearly basis. One of Salt & Pepper’s existing 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. Salt & Pepper has recently obtained a new audit client, Cinnamon Brothers Co (Cinnamon), whose year-end is 31 December. Cinnamon requires their audit to be completed by the end of February; however, this is a very busy time for Salt & Pepper and so it is intended to use more junior staff as they are available. Additionally, in order to save time and cost, Salt & Pepper have not contacted Cinnamon’s previous auditors. Required: A. Describe the steps that Salt & Pepper should take in relation to Cinnamon prior to accepting the audit. B. Identify and explain FIVE ethical threats which arise from the above actions of Salt & Pepper & Co; and for each ethical risk explain the steps which Salt & Pepper & Co should adopt to reduce the risks arising. Note: Prepare your answer using three columns headed The Issue, Ethical threats and Auditor's response respectively
Salt & Pepper & Co (Salt & Pepper) is a firm of Chartered Certified Accountants which
has seen its revenue decline steadily over the past few years. The firm is looking to
increase its revenue and client base and so has developed a new advertising strategy
where it has guaranteed that its audits will minimise disruption to companies as they
will not last longer than two weeks.
In addition, Salt & Pepper has offered all new audit clients a free accounts preparation
service for the first year of the engagement, as it is believed that time spent on the audit
will be reduced if the firm has produced the financial statements.
The firm is seeking to reduce audit costs and has therefore decided not to update the
engagement letters of existing clients, on the basis that these letters do not tend to
change much on a yearly basis.
One of Salt & Pepper’s existing 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.
Salt & Pepper has recently obtained a new audit client, Cinnamon Brothers Co (Cinnamon),
whose year-end is 31 December. Cinnamon requires their audit to be completed by the
end of February; however, this is a very busy time for Salt & Pepper and so it is intended
to use more junior staff as they are available. Additionally, in order to save time and
cost, Salt & Pepper have not contacted Cinnamon’s previous auditors.
Required:
A. Describe the steps that Salt & Pepper should take in relation to Cinnamon prior to accepting the audit.
B. Identify and explain FIVE ethical threats which arise from the above actions of Salt & Pepper & Co; and for each ethical risk explain the steps which Salt & Pepper & Co should adopt to reduce the risks arising. Note: Prepare your answer using three columns headed The Issue, Ethical threats and Auditor's response respectively.
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