Black & White CPA's (B&W) are looking to grow. To expand its client base, it has developed an advertising strategy where it guarantees that all audits will be completed within 10 business days. In addition, B&W has offered all new assurance clients free bookkeeping for the first year of the engagement. B&W believes that time spent on the audit will be reduced if the firm produces the financial statements. The firm is also looking to reduce staff time spent on audits and so it has advised staff not to update the engagement letters of existing clients because the letters do not change much. One of B&W's long time 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. B&W has recently obtained a new audit client, Clover Co (Clover), whose year end is March 31. Clover requires their audit to be completed by the end of April; B&W plans to use mostly junior staff on this audit, because it is their busy season and they do not have any senior staff available during that time. In order to save time and cost, Black & White have not contacted Clover's previous auditors.

Required:

1.Describe the steps that Black & White should take in relation to Clover: (i) Prior to accepting the audit. (ii) To confirm whether the preconditions for the audit are in place

2. State FOUR matters that should be included within an audit engagement letter.

3.(i) Identify and explain FIVE ethical risks which arise from the above actions of Black & White & Co; and (ii) For each ethical risk explain the steps which Black & White & Co should adopt to reduce the risks arising.