Pringle & Welch Ltd is a firm 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 minimize disruption to companies as they will not last longer than two weeks. In addition, Pringle & Welch Ltd 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 Pringle & Welch’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.
Pringle & Welch Ltd has recently obtained a new audit client, Cinnamon Brothers Ltd, whose year-end is 31 December. Cinnamon Brothers Ltd requires their audit to be completed by the end of February; however, this is a very busy time for Pringle & Welch Ltd and so it is intended to use more junior staff as they are available. Additionally, in order to save time and cost, Pringle & Welch Ltd have not contacted Cinnamon Brothers Ltd previous auditors.
(a) Identify and explain FIVE ethical risks which arise from the above actions of Pringle & Welch Ltd
(b) For each ethical risk explain the steps which Pringle & Welch Ltd should adopt to reduce the risks arising.
Guideline:
Use a two-column table to clearly relate the ethical risks to the corresponding risk reduction step.
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