Smith and Co are a UK-based accountancy and audit services firm with five partners. Smith and Co have provided audit services for many years to the CS Trimmings Group (‘CS Group’), a group of companies comprising CS Holdings Limited (a non- trading holding company) and five wholly owned subsidiary companies. The CS Group’s principal activity is the manufacture and supply of leather and fabric interiors to UK-based luxury car manufacturers. The CS Group is privately owned and has been led by Charles Sanders, the current CEO, since he founded the business more than 30 years ago. Charles Sanders and his family control more than 50% of the voting shares of CS. Charles has been a shrewd businessman over the years and has carefully invested CS’s free cash flow in the acquisition of local specialised trim shops throughout the UK enabling CS Group to provide trim parts to car manufacturers on a localised, ‘Just-In-Time’ basis. This private, family-run group has grown its manufacturing base from just one facility based in Walsall, West Midlands to five facilities based throughout the UK. CS Group has a board of six directors, comprising a non-executive chairman, two further non-executive directors and three executive directors. The executive directors are Charles Sanders (CEO), Tim Sanders (CFO) and Katie Sanders (Marketing Director). Charles and the board are currently considering a number of corporate governance improvement options, including whether to establish an audit committee comprising Charles, Tim and the non-executive chairman. Charles is keen to establish this committee because he believes that many of the external audit processes currently carried out by Smith and Co can be dispensed with. Charles is keen to renegotiate the group’s annual audit fee which has been growing over the years as the group and its annual report have grown in scope and size. Due to the increasing size and complexity of CS Group’s operations and the consequent impact on its financial control and reporting systems, the annual audit fee charged by Smith & Co has grown to be the largest in its portfolio of audit service clients. It now represents more than 15% of Smith & Co’s total audit fees. Smith and Co are now in the initial stages of planning the audit services that it may provide to CS Group in the next financial year. The Senior Partner is wary and wonders whether his firm should either continue as auditors or consider retiring.

Question

1. Smith & Co is considering whether to continue as auditor of the CS Group.

   (i) Why, and when, is Smith & Co required to consider whether to continue to provide audit services to CS Group? (5 marks)

   (ii) What specific tasks will Smith and Co carry out? (5 marks)

2. If Smith & Co decide to continue with the audit of CS Group, they will need to plan this year’s audit. Briefly describe the key steps of audit planning that Smith & Co will need to undertake if they agree to continue to provide audit services to CS Group. (10 marks)

3. Briefly discuss why Smith & Co needs an engagement letter with CS Group. (10 marks)

4. Briefly describe the key parts of an engagement letter. (10 marks)