Question

Simean & Co, a firm of CPA’s, issued an unqualified audit report for its client, Xing Manufacturing Corporation, a footwear manufacturer in Asia. Xing Manufacturing, listed its head office in Toronto, Ontario, and its shares were traded on a Canadian Stock Exchange. Simean & Co. knew the company was in the process of refinancing a significant bank loan coming due, and the bank was anxious to see the year end results. After an unqualified audit report was issued, the regulator of the stock exchange halted the trading of the shares after allegations of management fraud came to light. As a result, the share price plummeted and the company went out of business.

Required:

(a) List two (2) parties/groups that Simean & Co. owe a duty of care.

(b) Document four (4) criteria the bank must demonstrate to establish negligence?

(c) What two (2) legal defences are available to Simean & Co?

Answer 1

a)

Audit firm owe a duty of care to its stakeholders , mainly they owe

Firstly to shareholders , becuase auditors are appointed by shareholders . So the auditor have fiduciary duty and care towards shareholders to provide reasonable audit.

Secondly to public , they are more reliant on indepetend audit report . Public may include new potential investers who are planning to invest in xing co , so they will use audit report for deciding investing in the co . So we can say that relaibility of report is important.

b)

Duty :

Firstly there should be a relationship between plantiff and defenter , means there should be a legal relation or duty between both parties to demonstrate there is a negligence happend .

Breach of duty ;

Secondly there should be breach of the duty , the defetend should be involved in the conduct of activities which should breach the duty between them.

Cause in fact

The plantiff should proove that the defentend is in breach of duty of care , and he should able to claim the looses or damages suffered due to negligence

Proximate course

It relate the what is the liability for defentend under cilurrent breach of duty , defentend only responsible for tge damage created by him only . Others will be excluded from liability.

C)- letter of engagement ;

In letter of engagement auditor will specify the responsibility of auditors and they will mention scope and objective , this letter is agreed by shareholders so it is a strong defence when there is any legal issues.

- audit evidence

Audit report is generated fully based on audit evidence generated by auditors , so they can point out the evidence which lead to generate the audit opinion. So they can use it has a defence in court for claiming thier side.