BELLA BUSTER & PARTNERS

Bella Buster & Partners (Bella Buster) is a firm of CPAs located in Oshawa that has been in business for 20 years.

Bella Busters revenue has declined steadily over the past few years. The partners are looking for ways to increase the firms revenue and client base and so has developed a new advertising strategy which guaranteed that it will conduct its audits with minimal disruption to its clients with a promise that audits will not last longer than two weeks.

Bella Buster is also offering all new audit clients a free accounts preparation service for the first year of the engagement, since the partners believe that time spent on subsequent audits will be reduced if the firm has previously produced the financial statements.

In addition, Bella Buster is seeking to reduce its audit costs and decided it will not update the engagement letters of existing clients, on the basis that these letters do not tend to change much on an annual basis.

One of Bella Busters existing clients (John Madoff Co. Ltd) has suggested that this years 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.

Bella Buster has recently obtained a new audit client, Nutmeg Brothers Co (Nutmeg), whose year end is 31 December. Nutmeg is insisting that their audit must be completed by the end of February. However, this is a very busy time for Bella Buster and so it is intended to use more junior staff as they are available. Additionally, in order to save time and cost, Bella Buster does not plan to contact Nutmegs previous auditors.

One of Bella Busters partners recently got married to the Chief Financial Officer of Tim Wharton Company Limited (Tim Wharton). Tim Wharton has been a client of Bella Buster for the last 15 years.

Bella Buster recently hired Bill Bates (a CPA with considerable Information Technology experience) who was previously the team leader for the implementation of a new financial system for Nutmeg. The partners have scheduled Bill is to lead the audit team for Nutmegs audit and feels that it will not be necessary to review the application controls of Nutmegs new financial system as they can place reliance on the work done by Bill Bates.

Required:

a) Describe the steps that Bella Buster should take in relation to Nutmeg prior to accepting the audit engagement (2 marks)

b) State four matters that should be included within an audit engagement letter (2 marks)

c) Identify and explain SEVEN ethical risks which arise from the above actions of Bella Buster & Partners; and for each ethical risk explain the steps which Bella Buster & Partners should adopt to reduce the risks arising. (14 marks)

d) Comment on whether Bella Buster has applied sound professional judgement and professional skepticism. (3 marks)