Question

CFW Ltd (CFW) is a distributor and warehousing facility for chemicals and fertilizer. It was reported to be carrying a very high level of inventory in its audited balance sheet at the time a successful takeover offer was made by Warehousing Ltd. Two months after the takeover, it is discovered that those inventories CFW does hold were considerably over valued and that they do not in fact possess the quantity of inventory claimed at the time of the audit. In the court action subsequently filed by Warehousing Ltd against CFW’s auditors, the following matters were established in evidence:

1. The auditors did not attend all stocktakes at year-end.

2. CFW were present at those for the Sydney based operations of the company only, this inventory is determined to have been overvalued by 35%. Although the auditors correctly verified the quantity of Sydney stock, they accepted managements’ valuation, which did not take account of considerable obsolescence

3. 50% of the company’s inventory is purportedly held at the company’s Bathurst facility and it is this inventory that does not exist.

4. It is also raised in evidence that the auditors were subjected to considerable pressure by CFW’s management to complete the audit within one month of the balance date. The auditors had undertaken this audit for the past six years and there was no evidence of any previous misstatements of the value of inventory.

Warehousing Ltd asserted that they had relied on the audited financial statements, as supplied to them by CFW in making their takeover offer. There is no evidence that the auditors were aware of this intended use of the accounts.

Required:

a) Prepare the case for Warehousing Ltd in their efforts to sue the auditors for negligence. Refer to relevant case law and precedents.
b) Will Warehousing Ltd be successful in their legal action? Justify your position by referring to the relevant cases and precedents.
c) Explain if your answer to (b) would change if Warehousing Ltd had written to the auditors telling them that they intended to buy CFW and were relying on the audited financial statements to assist them in making their decision.

Answer 1

Auditing is an independent examination of and entity in order to express a opinion on financial statements . An expresses whether the statement is true and fair view or not.

Aur express is only a reasonable assurance because he cannot be able to verify or take making taken a consideration of all necessary documents only he can do taking samples of the necessary documents and verifying that.

Definitely warehouse limited can sue for audit for the over valuation ofoinventory which is not being effectively verified.

As per IAS 2 inventory it is valued at lower of cost or net realizable value but here it is not the case.

It is the auditor's responsibility to check whether there is any mis statement it and whether it is material or not , pervasive or not and take necessary action against that. The users of financial statements look up to to the old tradition statements in order to take a decision relating to the entity relating to their investment like that.

As the auditors auditor's here working more than 6 years the entity force and pressure them to complete their verification with things within their time period which is an indication of indimidation which is threat to their profession.

An hotel promotional person ki has to consider the basic principles like integrity objectivity professional competence and due care confidentiality etc.

But here the auditor is not professionally work ok as per their principles and proper accounting standards. As he destroyed his profession he will be definitely sued for that.

warehouse limited will be successful leave on the case because there is there all responsibilities in the hand of auditor and keep district the responsibility and he districts professional ethics too.

Warehouse limited take the takeover decision by using the verified financial statement by the auditor but definitely statement is not correctly verified or not correctly or didn't ask a request accounting standards and professional principles he mistakenly take over the company they are the entitywhich is overvalued there inventory. so that it can see you against the auditors and the case definitely will be won by warehouseand ltd.