The Audit Opinion of King & Queen - Assignment Example

1. Question one A. Audit liability The Audit Opinion of King & Queen affect the judgment of EFL, investors, shareholders and Creditors of the company Since, King and Queen were aware of the liquidity problem faced by the company but they neglect. The accounting standards provides that where a practitioner fails to adjust the audit report on financial statements that are materiality misleading, the users of the books of account might experience substantial loses. In this regards, the King and Queen shall be held liable for the loss suffered by EFL. It is the legal duty of the auditor to parties that place reliance e to the audited books of accounts to ensure that the books of account depict a true and fair of the company state of financial position. They can be sued for fraud and negligence in performance of the audit as in the case for King & Queen. Audit need to be independent in his audit work with professional skeptism. This is because, gratitude pressure would lead to distortion of audit report in order to satisfy the shareholders of the company and put the materiality risk to the company’s going concern . the King & Queen Auditors were therefore negligent in their audit work since, it is apparent that they were aware of the liquidity problems of the company but proceeded to give an unqualified audit report devoid of performing further substantive audit test such as an audit trail on their company liquidity in order to give an unqualified audit report with a disclaimer of option in order to reduce audit liability. The disclaimer of option is provide the auditor where he was not able to form and subsequently declines to present an opinion on the financial statement. This kind of report is issued when a practitioner tried to do an audit of a company but couldn’t finish the work because of many reasons and doesn’t issue an option[Cla081]. Case study Caparo Industries Plc V Dickman Caparo pursued the form Tourche Rossa due to sequence of share purchase of a fidelity company. Caparo claimed that the acquisition of shares was on the basis of wrong accounts that overestimated the company. They asserted also that, as auditors of fidelity, touché Ross owed substantial duty of care to investors. Held; It was held that the auditor has legal duty of ensuring that the audited books of accounts are true and fair view of the company state of financial performance and thus an investors, shareholder or creditors might use the audited report to make an investment decision. The audit was therefore not held liable since, there was no negligence on the Audit work[Rob10]. B. If EPL had written a letter to King and Queen Where EPL had written letter to King and Queen , the answer as above would not change since, it duty of the auditor to observe due care, be independent and provide audit report that is free and fair view of the company state of financial performance. Audit is require by the standards to observe Audit independent at all time and provide audit report with no material misstatement in order to ensure that report is a not misleading to any interested party. in recent times, there has been problem of Audit negligence and impact of unfair to those who commit fraud. Auditor’s independence is deep doubt hence the shareholders of the company are worried of the wealth and creditors are c0ncned about their debt. The Audit committee is currently practice that is assigned the duty of ensuring that the effect of Auditors negligence is minimized. An audit committee consequently acts as supervisory body of shareholders in guaranteeing that auditors execute their audit work in lawful and prearranged auditing standards[Chr11]. Auditor independence has been put into apprehension. The auditor didn’t put into practice the audit independence, honesty and adhere to the auditing standards in performing their audit work. A practitioner is mandated to execute their audit work with professional skeptism prior to giving a final verdict on the financial statement of the company. Professional skeptism guarantees that an auditor will execute audit work keenly in areas that is vulnerable to deception or of high materiality because, this might lead to bankruptcy of the corporation if appropriate audit is not undertaken. Consequently, the fall down of HIH was due to the auditors lack professional skeptism in establishing the, materiality of the books accounts and perceptive areas that requires in-depth audit so as to reduce audit risk[Hen07]. There has been problem with auditor’s negligence and consequence of it not being fare to practitioners who commit the fraud, auditor’s independence as well is in deep query and therefore the shareholders are worried of their wealth. Audit committee is the present practice that has been put in place so as to reduce consequence of auditors conspiring with executives to commit fraud. An audit committee consequently acts as supervisory body of shareholders in guaranteeing that auditors execute their audit work in lawful and prearranged auditing standards[Int07]. The Case of AWA Ltd v Daniels (1992) 7 ACSR as far as to auditor’s negligence is concerned Rodgers J in AWA Ltd v Daniels (1992) 7 ACSR 759 stated that “ relying on others is merely hard to deal with where the situation are so simple , identifiable and basic of approval that no single person with whichever scale of doubt may rely on the direction that has been provided. Auditor negligence will be held liable personally since he is permitted to observe due diligence in his audit work and professional skeptism in ensuring that Audit report is true and fair view of the company state of affairs. Negligence is illegal; where an au practitioner is found accountable of the negligence in his audit work he will be confined. Subsequently auditor ought to observe duty of care as far auditing is concern. Question two A. Actual Independence and perceived independence Actual Indepence This implies independence of an auditor which a slow known as independent of mind. Real independence relates to the state of mind of an auditor as well as how an auditor acts in dealing with some situations. On the basis of an auditor’s action or real independence in which an auditor is required to make an informed decision under critical situation. In this regards, under actual independent, an auditor must not be independent but seen to be independent in audit work. Perceived independence An auditor’s independence has the capacity to make an independent decision even if with lack of perceived independent presents or where an auditor is placed in an encompassing situation with the director of the company. Actual independence therefore is what the thread parties perceive as being independence and thus an auditor is perceived by others to be independent. When auditing the company and brother being an account, an auditor will be perceived not to be independent[Rob10]. Importance of perceived and Actual Independence both perceived and real audit independent are importance in attaining the objectives of independence. actual independence relates to the state of mind of a practitioner as well as how the auditor acts with some circumstance. A practitioner who is independent has the capacity to make independence verdicts even if there is perceived position by firm’s directors. Many intricacies line in establishing whether an auditor is truly independent, because, it is impractical to observe as well as appraise a person’s mental assertiveness as well as individual integrity. Contrary, the aim of an auditor should surpass the question which can be assured and appraised with perceived with independence. It is important that an auditor paper to be independent if an audit is in fact independent which can be summarized that an Audit report doesn’t represent a true and fair view,. Independent in appearance minimizes the chances of an auditor to act otherwise independently, which adds trustworthiness to the audit report[San10]. B. Professional standards and regulatory requirements breached and possible alternative courses of action the auditor 1). Wendy has breached the Audit and accounting standard since, she accepted duty of a secretary for Ace limited. The accounting standard provides that an auditor need to observed independent in his audit work and which is not the case for Wendy. The implication that the internal audit practices shall not be relied by external auditor in making a financial report opinion. The professional and legal standards breach by Wendy is the Auditors independence and breach of duty. The auditing standards require that a practitioner to be independent in his audit work and ensure that the internal audit practice is not under undue influence. The possible cause of action that Wendy should have taken is to decline the offer and retain her position of An internal Auditor of ACE limited. Where Wendy fills that there is threat of her audit work, she must resign and inform the incoming auditor of the reason for resignations[Chr11]. 2.) . The professional and legal standards breached are the duty of care and due diligence. It can be 0bserbed the work of an auditor of ensuring that there is effective internal control over cash payment is delegated to lead when the auditor is not around. Leo is not experienced in auditor and thus the effectiveness of internal control over cash payment is at risk. Leo is the son of the company’s foreman which implies that they might perpetrate frauds over cash. The auditor must therefore ensure that audit independence is upheld by guarantee effectiveness of internal controls as well non delegation of audit work. where an auditor feels that his independence is at risk due to action of Leo, he should include these in his report as a disclaimer of option or and provides an adverse reports to the users of the books of account. An auditor must reassign where he fills that there is breach of audit work by action of Leo to ensure effectiveness of cash over payment. By doing so, an auditor will be relieved from criminal or civil labiality that might arise due to loss suffered by investors and users of the books of account in placing reliance ion the audited books of accounts[Int07]. In minimizing the outcome of auditor’s carelessness and their sovereignty, the regulatory standards provides that an audit committee shall be created so that it can supervise the work of the auditor and also establishing the relationship between the auditor and the directors so to reduce chances of auditor and director conspiring and to commit deception. The audit board consequently acts as a shareholder’s supervisory body. auditor’s carelessness is illegal and consequently a practitioner who is found to be inattentive or perform a deceitful entries in the company’s books of account will be incarcerated given that accounting and auditing standards states that an auditor ought to be autonomous and seen to be independent during his audit work and consequently the statement should be free from material misstatement or result of unwarranted pressure[Cla081]. 3. Chan and associates have the breach the audit code of ethics of not accepting incentives such as shares or goods in settlement of audit fees. The standard provided that a practitioner shall only be entitled to Audit fees set out in the engagement letter. The impact of accepting shares and furniture in partial settlement of the audit fees would amount to breach of audit independence and thus the audit report cannot be relied upon in making informed decisions since, it will not be depicting the true and fair view state of financial position for the company. The cause of action that Chan and associate should take is therefore to reject the offer of 25% share in unrelated company and the furniture in partial settlement of audit fees since, this will affect their audit opinion and would amount to auditor’s liability . where Chan and associate deem that there independence is a t risk, they should re-assign auditors of classic production pty and notify the income auditors of the reasons for their resignation. This will therefore ensure that Chan and associates escape audit liabilities[San10]. Auditors are mandated to be autonomous in their audit work and their statement must be based on facts collected from the corporation books of accounts and not any modification (Emile Woolf, 2011). Where the auditors finds that their sovereignty is impede, the law commands him to incorporate this obstruction in his audit statement as a disclaimer of opinion because, the audit statement will be used by investor in placing reliance as whether to purchase or marshal a security based on a given state of financial statement provided by the audited report of accounts[Cla081]. Reference list Cla081: , (Borio, 2008), Rob10: , (Moeller, 2010), Chr11: , (Chris Davis, 2011), Hen07: , (Henning Kagermann, 2007), Int07: , (International Federation of Accountants, 2007), San10: , (Sandra Senft, 2010), Read More