Salt & Pepper & Co is a firm of Chartered Professional Accountants that 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. It is guaranteeing that all audit engagements will be completed for a fixed fee and all audits will be completed within a two-week time frame. In addition, Salt & Pepper has offered all new audit clients free bookkeeping services 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 Co., whose year end is December 31. Cinnamon requires its audit to be completed by the end of February; however, this is a very busy time for Salt & Pepper and so it is intending 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. State four matters that should be included within an audit engagement letter.

c. Identify and explain five ethical and engagement issues that arise from the above actions of Salt & Pepper, and for each issue explain the steps that Salt & Pepper should adopt to reduce the risks arising.