ACC568 - Legal Environment - Elegance Pty Ltd Case Study - Auditor’s Legal Liability - Law Assignment Help

Assignment Task

Learning outcomes

At the completion of this topic you should be able to:
• define negligence and indicate the elements which need to be proved for a claim to be successful;
• explain the concept of ‘due care’ including auditor’s duties in regard to the prevention, detection and reporting of irregularities;
• explain the auditor’s legal liability to clients;
• describe the concept of contributory negligence;
• evaluate the extent to which a duty of care may be owed to third parties;
• demonstrate an understanding of the interrelationship between the auditing standards and case law; and
• describe alternative proposals to limit auditors’ liability.

Solve this problem
Elegance Pty Ltd (Elegance), a fashion house, requested Young & Associates to conduct an audit of the company's records. The audit needed to be completed in time to submit an audited financial report to a bank as part of a loan application. As they were short of staff, audit partner Graham Young hired two accounting students to conduct the audit and spent several hours telling them exactly what to do. Graham told the students not to spend time reviewing the controls, but instead to concentrate on proving the mathematical accuracy of the ledger accounts, summarising the data in the accounting records that supported the financial report and obtaining explanations from client's staff for any variances. The students followed instructions and completed the audit within two weeks. Graham Young issued an unmodified audit report indicating that the financial report gave a true and fair view.

It was subsequently found that the inventory was significantly overvalued and the auditors had relied on management's representations about the value of the inventory. A large amount of inventory consisted of unsold stock of the past two years that was worthless due to changes in fashion trends. Also, one of the warehouse managers had not written off defective garments worth thousands of dollars. The bank withdrew their loan facility and Elegance was unable to fulfil a large number of orders resulting in a significant loss to the company.

Solve this problem
Sarah Brown, an auditor, was engaged by Sloan Financial Services Ltd (Sloan) to audit its financial report. Sarah was inexperienced in the financial services industry and performed her audit examination in a negligent manner. As a result of her negligence, she failed to discover substantial embezzlement by Larry Hooper, Sloan's finance director, resulting in significant unrecoverable losses that were not recorded in the financial report. Sloan has sued Sarah Brown for negligence.

Required
Explain whether Sarah has a liability to Sloan.

Solve this problem
Kline, Short & Barnes (KSB) have been the auditors of Crown Ltd (Crown), a large jewellery business, for many years. KSB's auditor's report for Crown for the year ended 30 June 2018 was unmodified, stating that in the auditor's opinion the financial report gave a true and fair view. In October 2018, Crown obtained a $1 million loan from Easy Credit Ltd (Easy Credit), a large finance company, to enable it to expand its operations into several regional centres. Subsequent to this, Crown experienced severe trading and liquidity problems, caused by a decline in its market and losses resulting from a fraud being carried out by senior management for several years. As a result,
Crown was placed into bankruptcy in December 2018, with little likelihood of Easy Credit being able to recoup their loan.

Required
Referring to relevant case law, outline a defence for your audit firm to any legal action taken by Easy Credit.

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