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    Tutorial 4 Questions

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    Shivneel Naidu
    The document summarizes questions from Chapter 5 of an auditing tutorial, including elements required for negligence cases, how the duty of care developed through case law, privity letters, and due care responsibilities. It also provides two case studies involving potential auditor negligence and liability to third parties.

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    Tutorial 4 Questions

    Uploaded by

    Shivneel Naidu
    61 views3 pages
    The document summarizes questions from Chapter 5 of an auditing tutorial, including elements required for negligence cases, how the duty of care developed through case law, privity letters, and due care responsibilities. It also provides two case studies involving potential auditor negligence and liability to third parties.

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    The document summarizes questions from Chapter 5 of an auditing tutorial, including elements required for negligence cases, how the duty of care developed through case law, privity letters, and due care responsibilities. It also provides two case studies involving potential auditor negligence and liability to third parties.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    61 views3 pages

    Tutorial 4 Questions

    Uploaded by

    Shivneel Naidu
    The document summarizes questions from Chapter 5 of an auditing tutorial, including elements required for negligence cases, how the duty of care developed through case law, privity letters, and due care responsibilities. It also provides two case studies involving potential auditor negligence and liability to third parties.

    Copyright:

    © All Rights Reserved
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    AF304

    Auditing
    Tutorial 4 Questions
    Chapter 5
    5.12 Name the elements necessar y to be successful in a case of negligence and show how
    these wer e applied in the case of Twomax Ltd v. Dickson, McFarlane & Robinson
    (1983).

    5.13 How did the key pr inciples of ‘due car e’ develop thr ough the Kingston Cotton Mill
    Co. case, the London and Gener al Bank case and the Pacific Acceptance case?

    5.14 The Esanda case established the elements that would be necessar y for a thir d par ty
    to succeed in an action of negligence against the auditor due to r eliance on the
    audited accounts. Identify what these elements ar e.

    5.20 What is a pr ivity letter ? How should an auditor r espond to a r equest for a pr ivity
    letter ?

    5.22 Due car e

    As the audit senior for Lockerparts Hardware Ltd, you are happy with the smoothness
    of the audit for the year ended 30 June 2015. Today, your audit partner tells you that
    Lockerparts has just gone into liquidation. The financial controller was diverting
    company funds into a Swiss bank account and has left the country to live in Majorca.
    The lawyers for the creditors of Lockerparts are taking action against the partner for
    not performing an appropriate audit. They believe that a properly conducted audit
    should have detected such a fraud.
    The fraud was substantial; however, it was not material from the company’s point of
    view. You explain to the partner that the audit was performed in accordance with all
    auditing standards and nothing was found to arouse suspicion during the audit. The
    audit took the same amount of time as last year’s, and all appropriate work steps were
    performed. Your work was reviewed by a manager and the entire file was reviewed by
    the audit partner.
    The audit partner is still concerned. He rings an audit partner in an associated office of
    your accounting firm and asks her to review the audit file. She agrees and spends a day
    reviewing the file. After completing her review, she is satisfied that the audit was
    performed properly.

    Required
    (a) Explain whether your accounting fir m has acted with due car e. What do you think
    will be the cour t's decision if the case goes to tr ial?
    (b) Even if the par tner is convinced he acted with due car e, explain why he may offer
    Locker par ts a substantial settlement amount.

    5.24 Negligence, liability to thir d par ties

    Sonny Manufacturing Ltd sought a $2 million loan from Bank of Australia. The bank
    insisted that audited financial statements be submitted before it would extend the credit.
    Sonny agreed to do this and also agreed to pay the audit fee. An audit was performed by
    an independent qualified accountant who submitted his report to Sonny to be used
    solely for the purpose of the loan negotiation with the bank. The bank, after reviewing
    the audited financial statements, decided not to extend the loan to Sonny. The bank had
    been using some ratios from the financial statements and decided they were too low.
    Sonny used the financial statements to obtain a loan from another financial institution.
    However, it was subsequently discovered that the auditor had failed to detect a
    significant embezzlement by a senior manager at Sonny.

    Required
    (a) What ar e the liabilities, if any, of the auditor ? To whom is the auditor liable?
    (b) If the auditor did uncover the embezzlement, and noted it in the notes to the financial
    statement, is he still liable and to whom?
    (c) What factor s should appr opr iately be consider ed befor e the auditor ’s liability is
    confir med?

    5.29 Negligence, contr ibutor y negligence

    You are the external auditor of Kiwi Tours Ltd, a company which promotes New
    Zealand tours to Australia and owns a chain of duty-free shops. You have been auditing
    the company since it was listed on the Australian Securities Exchange 10 years ago.
    Although the accounts have never been qualified, you are aware that the company has
    been making losses for the past 3 years as a result of short-term cash flow difficulties.
    The company has no long-term loans and the bank overdraft is near its limit at the end
    of the financial year.
    During the financial year, the company upgraded its accounting system to a computer
    database. A consultant was hired to aid in the correct changeover of files for this
    system. At year-end, this new system had been in place for 6 months, and the directors
    report they are happy with the way it is operating. You do not have the expertise to
    review and evaluate the database management system, so you ask an independent
    expert to undertake this role. This person concludes that the system appears reliable
    and that the changeover was correctly carried out. You have never before audited this
    type of system, so you attend some courses to familiarise yourself with its features. Your
    firm has a standard work program that you use to test the controls operating within the
    system.
    In your review of the minutes of the board of directors’ meetings, you become aware
    that the New Zealand parent company (which owns 40 per cent of the shares of the
    company) is considering making an offer for the remaining shares. This is because the
    company’s share price is trading well below its net asset backing.
    After your audited 30 June 2009 financial statements are published, the takeover offer
    from the New Zealand parent company proceeds on the basis of an offer price
    equivalent to the net asset backing of $1.10 per share (as determined from the financial
    statements). The takeover results in acceptances of 96 per cent of the issued capital, and
    compulsory acquisition proceedings have been instituted for the other 4 per cent.
    While these compulsory acquisition proceedings are being instituted, it is discovered
    that there were errors in the changeover of the computer system, which resulted in
    inventory at the duty free stores being materially misstated. After the subsequent write-
    down of inventory, a new asset backing of $0.70 per share is established. The New
    Zealand parent company is suing you for alleged negligence for its loss of $0.40 per
    share.

    Required
    · Decide what major questions must be answer ed to deter mine whether you have
    been negligent. You should suppor t your answer by r efer ence to case law and the
    auditing standar ds.
    · Outline the major issues to be deter mined to decide whether the company is guilty
    of contr ibutor y negligence.
    · Assuming you wer e negligent, explain whether you owe a duty of car e to the New
    Zealand par ent company.

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