Question 1. A. You are the aud
Question 1.
A. You are the audit partner of Simon & Co. a large auditfirm that is operating in Melbourne. your firm audited ABC Ltd. acustom -made products manufacturing company. ABC ltd declaredbankruptcy within six months of receiving an unqualified auditor’sopinion on its financial statements for the year ended 21 December2018.
The XYZ bank initiated a court challenge against your firm onthe grounds that the bank disbursed a “2500000 loan to ABC Ltd inMay 2019, but ABC went bankrupt shortly afterwards. The plaintiffalleged that your firm’s 2018 audit of ABC was deficient and arguedthat the auditors failed to uncover that the value of ABC’sinventories were substantially lower than reported on the balancesheet. your audit firm did not issue privity letters to any thirdparty 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 tosatisfy to successfully sue an auditor for negligence ?
C.
Why is independence so essential for auditors ? Explain thedifference between independence in appearance and independence infact ?
Answer:
Answer toA:
As per the Law an auditor responsibility is to check theinventory records & balances in balance sheet is proper or notif found any major discrepancy, he should inform the management& if management refuses to change, he should qualify thereport. But in the given case he had given unqualified opinion& also doesn’t give privity letters So XYZ limited is right insaying that Simon & Co. has not done proper audit.
Answer toB:
The Legal requirements are showing the fact that instead ofwrong figures he had made unqualified opinion. Also proof afterfinalizing accounts only ABC Limited get bankrupt.
Answer toC:
As per Chartered Accountants Act Only Independence is essentialfor the Auditor, he has to maintain independence all the timeduring the audit.
Independence in Fact is a state of mind that permits theprovision of opinion without being affected by that influencescompromise professional judgement.
Independence in. appearance is the absence of activities,relationships, or other circumstances that would lead well-informedinvestors and other users of financial information to conclude thatan unacceptably high risk.
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