HI6026 Audit Tutorial Answer for Question Two
HI6026 Audit, Assurance and Compliance
You have been the auditor of Data Ltd for two years. Your auditor’s report for Data for the year ended 30 June 2018 was unmodified, indicating that in your opinion the financial report gave a true and fair view. In August 2018, Data obtained a large loan from Better Bank Ltd, to provide additional working capital. Subsequently Data suffered severe trading difficulties and was placed into liquidation in late December 2018, with insufficient funds to repay the loan to Better Bank.
Outline a defense for your audit firm to any legal action taken by Better Bank to recover its loss. (10 marks)
In the given case the auditor report for the year ended 20 June 2018 is unmodified which means that the financial statements represent true and fair view and are correct in all material respects.
Auditors are highly important people beacause ultimately they are responsible for enhancing the reliability of financial statements for all kinds of external users. The code of proffesional conduct states that the auditor must go about their busssiness with due care.
Due care generally implies four things:
i) the auditor must possess the requisite skills to evaluate accounting entries .
ii) The auditor has the duty to employ such skill with reasonable care and deligince.
iii) the auditor undertakes his task with good faith and integrity but is not infallible.
iv)The auditor may be liable for negligence,bad faith,or dishonesty, but not for mere errors in judgement.
v) The auditor should be independent of entity and has conducted his audit with due care.
If all the above conditions are fulfilled the auditor should not be held responsible for any loss that has been caused to any party of the entity.
In the present scenario the audit is completed on 30June 2018 and the Data company has raised funds in the month of august which was not known to the auditor at the time of signing the audit report.In the given question it is also not given whether any contengency was there for raising a loan at the time or on before the signing of audit report.
So the defence methods that the audit company can use in its favour in defending the lawsuit are :
i) The auditor is solely responsible for making sure that the financial statements are presented fairly against the appropriate evaluation criteria.It does not consider the future events that occur after signing the audit report.
ii) The errors originate from unfortunate situations and are not the auditors responsibility.
iii) The auditor is not responsible for making sure that the company is viable and continue operating in the long -term.
iv) There are situations that deals with errors in financial statements that can remain even after the auditor has followed the auditing rules provided by the governing body. The risk involved in this is known as audit risk and the auditor cannot be held responsible for it.
Note: Please use these answers at your own risk !!
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