Godwin, Key & Associates is a small, but rapidly growing, audit firm. Its success is largely due to the growth of several clients that have been with the firm for more than five years. One of these clients, Carolina Company Ltd, is now listed on the ASX and must comply with additional reporting regulations.

Carolina Company Ltd’s rapid growth has meant that it is financially stretched and its accounting systems are struggling to keep up with the growth in business. The client continuance decision is about to be made for the next financial year.

The managing partner of Godwin, Key & Associates, Rebecca Sawyer, has recognised that the audit firm needs to make some changes to deal with the issues created by the changing circumstances of its major client and the audit firm’s overall growth. She is particularly concerned that the audit firm could be legally liable if Carolina Company Ltd’s financial situation worsens and it fails.

Required

(a) Provide guidance to Rebecca about the steps she can take to avoid the threat of litigation if Carolina Company Ltd fails.

(b) What should Rebecca consider when making the client continuance decision for Carolina Company Ltd for the next financial year?