Question

Smith Corp. orally engaged TRA CPAs, to audit its financial statements. The management of Smith Corp. informed TRA CPAs that it suspected that the accounts receivable was materially overstated. Although the financial statements audited by TRA CPAs did, in fact, include a materially overstated accounts receivable balance, TRA issued an unqualified opinion. Smith Corp then relied on the financial statements in deciding to obtain a loan from Town Bank to expand its operations and Town Bank relied on the financial statements in making the loan to Smith Corp. As a result of the overstated accounts receivable balance, Smith Corp. has defaulted on the loan and has incurred a substantial loss. If Smith Corp sues TRA CPAs for negligence in failing to discover the overstatement, what is TRA CPA's best defense?

Answer 1

IN THIS CASE THE AUDITOR ISSUED AN UNQUALIFIED OPINION. WHICH MEANS THAT THE FINANCIAL STATEMENT IS AS PER THE GUIDELINES OF A I CPA AND THE ACCOUNTS ARE FAIR AND APPROPRIATE .SO IT IS CLEAR THAT AUDIT REPORT IS BIASSED .

BUT THE MAIN LOOP HOLE IN THIS CASE IS THAT THERE IS NO WRITTEN CONTRACT BETWEEN AUDITOR AND THE COMPANY. THEY ARE ENGAGED IN THE AUDIT ORALLY.

BUT IN REALITY IT IS A TYPE OF NEGLIGENCE BY THE AUDITOR. IT SHOWS THEIR INABILITY TO FIND THE MANIPULATIONS OR MISTAKES IN ACCOUNTS.

AS THE COMPANY KNOWS THAT THEIR ACCOUNTS HAVE A MATERIALLY OVERSTATED ACCOUNTS RECEIVABLES, THERE INTERNAL AUDITORS IS ALSO RESPONSIBLE TO FIND AND CORRECT THIS PROBLEM.

AFTER PROVIDING THE AUDIT REPORT COMPANIES MANAGEMENT IS ALSO RESPONSIBLE TO KNOW WHETHER THE PROBLEM OF OVER ESTIMATION GET SOLVED. WHICH MEANS THAT THE COMPANY ALSO SATISFIED WITH THE AUDIT REPORT.

THE AUDITOR CAN ARGUE THAT THE COMPANIES INTENTION WAS TO ACQUIRE LOAN BY HIDING THE MATERIAL FACTS. BUT IT IS A DEFAULT IN THE RESPONSIBILITY OF AUDITOR.

SO IN THIS CASE THE AUDITORS MAY PUT IN FRONT THAT THERE IS NO LEGAL AGREEMENT BETWEEN THE COMPANY TO AUDIT THEIR ACCOUNTS. BUT THE FACT IS THAT THE DEFAULT MADE BY THE AUDITOR IS SERIOUS AND DERELICTION OF THEIR DUTY..

THANK YOU