(a) You are an audit manager in Pointer & Co, a firm of Chartered Certified Accountants which offers a range of assurance services. You are responsible for the audit of Vizsla Ltd, a company which provides approximately 10% of your firm’s practice income each year. The finance director of Vizsla Ltd has recently contacted you to provide information about another company, Setter Ltd, which is looking to appoint a provider of assurance services. An extract from the email which the finance director of Vizsla Ltd has sent to you is shown below:

‘One of my friends, Gordon Potts, is the managing director of Setter Ltd, a small company, with annual revenue of around £8 million, which is looking to expand in the next few years. I know that Gordon has approached the company’s bank for finance of £6 million to fund the expansion. To support this loan application, Gordon needs to appoint a firm to provide a limited assurance review on the company’s financial statements. He would also want the appointed firm to provide tax planning advice and to prepare both the company’s and his personal tax computations for submission to HMRC. I have asked Gordon to contact you, and I hope that Pointer & Co will be able to provide these services to Setter Ltd for a low fee. If the fee you suggest is too high, and unacceptable to Gordon, then I will recommend that Gordon approaches Griffon & Co instead, and I would also consider appointing Griffon & Co to provide the audit of Vizsla Ltd.’

Griffon & Co is a firm of Chartered Certified Accountants which has an office in the same town as Pointer & Co.

You have done some research on both Setter Ltd and Gordon Potts and have confirmed that the company is owner-managed, with the Potts family owning 90% of the share capital. Gordon Potts is a director and majority shareholder of three other companies. An article in a newspaper from several years ago about Gordon Potts indicated that one of his companies was once fined for breach of employment law and that he had used money from one of the company’s pension plans to set up a business abroad, appointing his son as the managing director of that business.

Required:
In relation to Pointer & Co’s potential acceptance of Setter Ltd as a client of the firm:

(i) Explain the ethical issues, and other matters which should be considered; and
(ii) Explain the importance of performing know your client procedures and recommend the information which should be obtained. (16 marks)