You are a senior manager in Clark & Co, and you are responsible for the audit of Louise Co, a manufacturer of plastic toys that are exported all over the world. The audit senior, who has just completed the planning of the forthcoming audit for the year ending 30 June 2021, has brought the following matter to your attention:
During a discussion with the production manager, it was revealed that there have been some quality control problems with the toys manufactured between March and May 2021. It was discovered that some of the plastic used in the manufacture of the company's products had been contaminated with a dangerous chemical that has the potential to explode if it is exposed to high temperatures. Louise Co did not recall any of the products that had been manufactured during that time from customers, as management felt that the risk of any injury being caused was remote.
Your firm has been invited to tender for the provision of the external audit service to Zilla Co. You are aware that Zilla Co operates in the same industry as Louise Co, and that the two companies often enter into highly publicized, aggressive advertising campaigns featuring very similar products. Zilla Co is a much larger company than Louise Co, and there would be the opportunity to offer some non-audit services as well as the external audit.
Required: Assess the ethical and professional issues raised, and recommend any actions necessary in respect of:
(i) the contaminated plastic used by Louise Co; and (5 marks)
(ii) the invitation to audit Zilla Co. (5 marks)
Note: for each matter, consider the single most applicable Fundamental Principle and Ethical Threat. You should also consider what overall guidance, recommendations, rules that exist before recommending the actions to be taken by Clarke & Co.