Audit And Assurance Service Assignment

Running head: AUDIT AND ASSURANCE SERVICE
Audit and Assurance Service
Name of the Student
Name of the University
Author’s Note

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Table of Contents
Answer to Question 1............................................................................................................................ 2
Introduction........................................................................................................................................ 2
Elements of the Tort of Negligence.................................................................................................... 2
Whether the Liquidators of Framed are Likely to be Succeed............................................................2
Whether OEV can reduce the Liquidators’ Liability............................................................................2
Whether VicBank is Likely to Succeed............................................................................................... 2
Conclusion......................................................................................................................................... 3
Answer to Question 2............................................................................................................................ 3
References............................................................................................................................................ 6

2AUDIT AND ASSURANCE SERVICE
Answer to Question 1
Introduction
Negligence of the auditor is considered as a crucial aspect that affects both the audit works
and the audit clients. Liabilities of the auditors increase due to the presence of negligence. The aim of
the report is the analysis of negligence in auditing and its effects on the profession.
Elements of the Tort of Negligence
There are four elements of tort of negligence and they are as discussed below:
Duty – Duty refers to a legal obligation and a defendant needs to have owed a duty to the plaintiff in
order to get sued for negligence. In this context, the case between Donoghue vs. Stevenson (1932)
need to be mentioned where the civil law of tort of negligence and obliged business was established
for the observation of the duty of care towards the customers (Russell, 2016). As per the provided
case study, OEV has a duty to provide audit services to Framed.
Breach – This is a violence of duty and the duty must be violated by the defendant in order to be
liable for negligence. In this case, OEV violated the duty by being negligent in audit and therefore, the
auditor was not able in identifying the fraud carried out by two sales officer of Framed.
Cause – The plaintiff must be caused harm by the breach of duty (Gay &Simnett, 2017).
Harm – The plaintiff must suffer harm for suing for negligence. He/she cannot sue if he/she does not
suffer any harm. In this case, VicBank was suffered harm as it extended credit to Framed based on
the audited report provided by OEV (Gay &Simnett, 2017).
Whether the Liquidators of Framed are Likely to be Succeed
Application of the above-discussed four elements of tort of negligence shows that OEV, the
defendant owed duty to Framed, the plaintiff which provides Framed the right to sue OEV. Moreover,
breach in duty was there from OEV as it failed in detecting the fraud carried out in revenue and
receivables. However, it is not mentioned in the case that whether Framed had suffered any harm or
not in order to sue OEV for negligence. This reduces the possibility of success of the liquidators of
Framed (Gay &Simnett, 2017).
Whether OEV can reduce the Liquidators’ Liability
There are three ways that can reduce the liability of OEV to the liquidators of Framed. The
first way is not being negligent in the first place and this can be done by rigorously applying the
appropriate auditing standards. The second way is the inclusion of disclaimer of liability to the third
party in the wording of the audit report. Disclaimer does not reduce the whole liability, but reduces the
scope for the courts to assemble liability. The third way is the use of Liability Limitation Agreement
(LLA) for the reduction of threat of litigation from the liquidator.
Whether VicBank is Likely to Succeed
Based on the four elements of tort of negligence, it can be determined that OEV has duty of
care towards VicBank as it used the audited financial statements provided by OEV for deciding

3AUDIT AND ASSURANCE SERVICE
whether to extend credit to Framed or not. OEV violated this duty by failing in identifying the fraud
carried out in sales and receivables which materially overstated sales and receivable of Framed. In
this way, OEV violated the principles of ASA 500 Audit Evidence and ASA 700 Audit Opinion as the
auditors collected incorrect audit evidence and issued wrong audit opinion (auasb.gov.au, 2020). This
also questions the professional competence and ability of OEV as per APES 110, Subsection 113
Professional Competence and Due Care. The case also shows that this action of OEV has caused
harm to VicBank. Therefore, VicBank is likely to succeed against OEV (Gay &Simnett, 2017).
Conclusion
There are four key elements of tort of negligence; they are duty, breach, cause and harm. The
liquidators of Framed are not likely to succeed in the action against OEV. There are three steps that
the auditors can take to reduce the liability of the liquidators of Framed. Lastly,VicBank is likely to
succeed against OEV as OEV owes duty of care to it and also caused harm to it..
Answer to Question 2
American Accounting Association Model Decision-making process
1. Determine the facts
The fact are that Jack discovered a material cut-
off error that contributed to the material
overstatement of revenue; and in spite of the
fact that this material adjustment is supposed to
be documented in working paper, Bruce who is
the senior audit manager ordered Jack not to
mention it in the working paper as he does not
want to upset the audit client.
2. Define the ethical issues
The ethical issue in this case is whether or not
documenting the material adjustment in the
working paper as per the order of Bruce. In not
documenting this in the audit working paper,
Jack would be active illegally and would be
responsible for neglecting the professional
duties and responsibilities in accordance with
APES 110.
3. Identify the major principles, rules, and values The key principles, rules and values related to
the case are integrity and objectivity as per
APES 110. According to APES 110, Subsection
111 Integrity, it is required for the auditors to
maintain straightforwardness and honesty in all

4AUDIT AND ASSURANCE SERVICE
American Accounting Association Model Decision-making process
business and professional dealings and it
meansdealing fairly and faithfully (apesb.org.au,
2020). Moreover, according to APES 110,
Subsection 112 Objectivity, there is a
responsibility on the auditors of not
compromising the business and professional
judgments due to any bias, conflict of interest
and undue influence (apesb.org.au, 2020). In
accordance with APES 110, Subsection 115
Professional Behavior, the auditors are required
to maintain distance from the situations that can
lead to the impairment of audit integrity and
audit objectivity (apesb.org.au, 2020). These
are the key rules, values and principles that are
applicable to this particular situation
(apesb.org.au, 2020).
4. Specify the alternatives
In this particular situation, the presence of two
alternatives can be seen. The first option is to
agree with the order of Bruce by not
documenting the material adjustments in the
audit working paper. The second option is to
refuse to agree with this direction of Bruce and
to take appropriate actions consequently.
5. Compare values and alternatives It is required to compare the values with the
alternative. The main values and principles are
integrity and objectivity as per APES 110
(apesb.org.au, 2020). The strategyhaving
consistency with the values, standards and
principles is not to agree with the order to Bruce
not to mention the adjustment in the working
paper. This would require Jack to document the
material cut-off error in revenue in the working
papers so that further audit considerations can
be provided to this issue (Chartered
Accountants Australia and New Zealand, 2018).

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American Accounting Association Model Decision-making process
There would be breach of the fundamental audit
ethical principles of integrity and objectivity in
case the Jack agrees with the order of Bruce
and does not document the material adjustment
in the audit working papers.
6. Assess the consequences
Under the first option, Jack would agree with
direction of Bruce and would not mention the
adjustments in the working papers. This would
help OEV to retain the client, but Jack would
expose himself to the risk of being in trouble
professionally and legally. He would have to live
with himself knowing the fact that he had
violated the principles of integrity and objectivity
intentionally.
Under the second option, Jack would refuse the
order to not documenting the adjustments in the
working papers. This would probably lead to the
creation ofnegative condition for the audit client
and could jeopardize the forthcoming client-
auditor association. However, this would
prevent in violating the audit ethical rules and
would maintain as well as enhance the social
standing and reputation of the auditors of OEV
by maintaining public confidence in audit and
serving to the best interest of the stakeholders.
7. Make your decision
The ethical decision is to choose the second
option. Jack should mention the adjustment in
the working paper.

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References
Apesb.org.au. (2020). APES 110 Code of Ethics for Professional Accountants. Retrieved 8 March
2020, from
https://www.apesb.org.au/uploads/standards/apesb_standards/23072019055710_APES_110
_Code_of_Ethics_for_Professional_Accountants_December_2010_-_Final.pdf
Auasb.gov.au. (2020). Auditing Standard ASA 500 Audit Evidence. Retrieved 19 March 2020, from
https://www.auasb.gov.au/admin/file/content102/c3/ASA_500_Compiled_2019-FRL.pdf
Auasb.gov.au. (2020). Auditing Standard ASA 700 Forming an Opinion and Reporting on a Financial
Report. Retrieved 19 March 2020, from
https://www.auasb.gov.au/admin/file/content102/c3/ASA_700_Compiled_2017_15032995639
48.pdf
Gay, G. E., &Simnett, R. (2017). Auditing and assurance services in Australia (6th ed.rev). Roseville:
McGraw Hill.
Russell, E. J. (2016). Product liability-“private use” and “proximity” present problems. Scots Law
Times, (11), 45-49.