1. Mr Blowy and Mrs Flowy are both qualified accountants and registered auditors and trade as a two partner firm called Blowy & Flowy (B&F). They employ six additional staff: 5 audit assistants and one administrator. The partnership is very successful and undertakes many small audits. The busiest periods for audit are January through to June. The main work through the second half of the year is mainly accounts preparations and payroll. The workload is unbalanced and B&F are contemplating recruiting temporary staff to help out with the busy audit period as everyone has to work long days and evenings to deal with the current workload. To date there has been no interest in the temporary jobs and B&F have been unable to recruit additional staff. B&F have been approached by Dry Guy Ltd (DG Ltd) to become their new auditors. You are an experienced audit assistant and have made the following notes at a meeting with the directors of DG Ltd this morning.

DG Ltd supply hairdryers to the hairdressing industry.

DG Ltd.s year end is 31st December.

DG Ltd holds substantial inventory across 10 locations.

DG Ltd has expanded rapidly this year and as a celebration they have invited the audit team to a free all inclusive holiday at a 5 star golf and spa hotel in the Highlands of Scotland.

The directors of DG Ltd require one-off consultancy work representing 10% of the current years total fee income of B&F. (The audit fee will represent 7% of total fee income).

DG Ltd is eligible for the audit exemption again this financial year, although they have opted to be audited annually for the past 5 years.

The current auditors are not aware of the fact that DG Ltd has contacted us as new auditors. DG Ltd will not under any circumstances allow us to contact the current auditors.

One of DG Ltd.s directors, Mr Kushty, made a suggestion that he does not like auditors as they are parasites on the back of business. However the other directors are keen to have an audit as the business requires a substantial loan to fund the business expansion process.

Required: a) If the directors of DG Ltd decide to dismiss their current auditors what legal procedures must be followed? (8 Marks)

b) Explain the current auditors legal rights in this situation. (12 marks)

c) In your opinion, should B&F accept DG Ltd as a new audit client? Explain your reasons. (18 Marks)