Question

Question 1.

A. You are the audit partner of Simon & Co. a large audit firm that is operating in Melbourne. your firm audited ABC Ltd. a custom -made products manufacturing company. ABC ltd declared bankruptcy within six months of receiving an unqualified auditor's opinion on its financial statements for the year ended 21 December 2018.

The XYZ bank initiated a court challenge against your firm on the grounds that the bank disbursed a "2500000 loan to ABC Ltd in May 2019, but ABC went bankrupt shortly afterwards. The plaintiff alleged that your firm's 2018 audit of ABC was deficient and argued that the auditors failed to uncover that the value of ABC's inventories were substantially lower than reported on the balance sheet. your audit firm did not issue privity letters to any third party in the past four years.

Required:

With reference to the principles established in common law, explain whether the XYZ bank is likely to be successful?

B.

What are the legal requirements that a third party has to satisfy to successfully sue an auditor for negligence ?

C.

Why is independence so essential for auditors ? Explain the difference between independence in appearance and independence in fact ?

Answer 1

Answer to A:

As per the Law an auditor responsibility is to check the inventory records & balances in balance sheet is proper or not if found any major discrepancy, he should inform the management & if management refuses to change, he should qualify the report. But in the given case he had given unqualified opinion & also doesn’t give privity letters So XYZ limited is right in saying that Simon & Co. has not done proper audit.

Answer to B:

The Legal requirements are showing the fact that instead of wrong figures he had made unqualified opinion. Also proof after finalizing accounts only ABC Limited get bankrupt.

Answer to C:

As per Chartered Accountants Act Only Independence is essential for the Auditor, he has to maintain independence all the time during the audit.

Independence in Fact is a state of mind that permits the provision of opinion without being affected by that influences compromise professional judgement.

Independence in. appearance is the absence of activities, relationships, or other circumstances that would lead well-informed investors and other users of financial information to conclude that an unacceptably high risk.