Question 13 Covenant and Associates (CA) is a fimm of Certified Public Accountants which 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 where it has guaranteed that its audits will minimise disruption to companies as they will not last longer than two weeks. In addition, CnA has offered all new audit clients a free accounts preparation service 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 CnA'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. CnA has recently obtained a new audit client, JACOB Brothers Co (JACOB), whose year end is 31 December. JACOB requires their audit to be completed by the end of February; however, this is a very busy time for CnA and so it is intended to use more junior staff as they are available. Additionally, in order to save time and cost, CnA have not contacted JACOB's previous auditors. Required a) Describe the steps that CnA should take in relation to JACOB: (1) Prior to accepting the audit; and (ii) To confirm whether the preconditions for the audit are in place. b) State FOUR matters that should be included within an audit engagement letter. c) (i) Identify and explain FIVE ethical risks which arise from the above actions of CnA & Co; and (ii) For each ethical risk explain the steps which Covenant and Associates should adopt to reduce the risks arising Question 14 Define materiality and explain briefly the distinction between: Planning materiality (at the financial statement level), and Tolerable error (at the account level)