Auditing and Assurance | Assignment | Answers

Running head: AUDITING AND ASSURANCE
Auditing and Assurance
Name of the Student
Name of the University
Author’s Note

1AUDITING AND ASSURANCE
Table of Contents
Answer to Question 1......................................................................................................................2
Introduction..................................................................................................................................2
Answer to Requirement 1............................................................................................................2
Answer to Requirement 2............................................................................................................2
Answer to Requirement 3............................................................................................................3
Answer to Requirement 4............................................................................................................3
Conclusion...................................................................................................................................3
Answer to Question 2......................................................................................................................4
Advise to Jack regarding the Information of the Audit of Switch Ltd........................................4
References........................................................................................................................................8

2AUDITING AND ASSURANCE
Answer to Question 1
Introduction
In case a plaintiff wants to win a lawsuit for negligence against the defendant, he/she is
needed to prove all the elements of tort of negligence (Dobson, 2015). The same aspects is also
applicable in audit-client relationship as the client or any other third party is required to prove the
presence of all elements of tort of negligence winning the lawsuit against the auditor.
Answer to Requirement 1
Duty of care, Breach of duty of care, Cause in fact and Damages are the four elements of
tort of negligence and these are further discussed below:
1. Duty of Care – The result of the negligence cases depend on whether the defendant owed a
duty of care to the plaintiff (Pappalardo, 2015). The facts of the case demonstrates that Oscar
Edwards Vance (OEV) is the audit partner of Framed Ltd; and as per law, there is a relationship
between OEV and Framed Ltd that requires OEV to act in the best interest of Framed Ltd.
2. Breach of Duty of Care – Along with proving the presence of duty of care, the plaintiff needs
to prove that there is violation of duty of care. There might be violation of duty of care in Framed
Ltd as OEV issued unmodified audit opinion even in the presence of materially overstated sales
and receivables (Buckley, 2018).
3. Cause in Fact – This requires proving that the actions of the defendant are the actual reason
of the plaintiff’s damage. The damages of Framed Ltd’s creditors were due to the issue of wrong
audit opinion by OEV.
4. Damages – It is required for the plaintiff to prove a legally recognized harm or damage. For
example, VicBank had to face financial loss due to extending credit to Framed Ltd.
Answer to Requirement 2
The audit-client relationship between OEV and Framed Ltd proves that OEV owed duty
of care to Framed Ltd; and this was violated when OEV failed in recognizing the fraud carried
out by two of Framed Ltd’s sales representatives for earning bonus which materially overstated
sales and receivables. This proves that whatever damage is caused to Framed Ltd was because of

3AUDITING AND ASSURANCE
OEV as the auditors overlooked the fact that Framed Ltd had reasonable revenue even after the
cash flows issues; and they did not feel the necessity of assessing the company’s going concern
status. Now, it is needed for the liquidators of Framed Ltd to prove a legally recognized harm
(Zipser, 2017). Thus, the liquidators of Framed Ltd are likely to succeed in their actions against
OEV as negligence was there.
Answer to Requirement 3
The liability of the auditors is generated from negligence and the same can be seen from
the auditors of OEV. They were negligent in the audit of Framed Ltd as neither had they assessed
the going concern position of Framed Ltd even after major cash flow issues nor they considered
the abnormal increase in revenue even in the cash flow issues (Goudkamp, 2017). Thus, they
failed in identifying the ongoing fraud by the sales representatives that caused material
overstatement in sales and receivables. Since, it is proved that OEV was negligent in the audit of
Framed Ltd; their liability to the liquidators cannot be reduced.
Answer to Requirement 4
Since VicBank was an user of the audited financial statements issued by OEV, OEV also
owed a duty of care to VicBank and this was breached because of the issue of inappropriate audit
report by neglecting the major audit risk areas in Framed Ltd’s financial statements. Therefore,
the actions of OEV was the reason for the damage caused to VicBank; and the damage can easily
be expressed into monetary terms as VicBank extended overdraft opportunity to Framed Ltd
(Barker, 2015). All these increase the likelihood of success of the actions of VicBank agasint
OEV.
Conclusion
The above discussion indicates towards the importance of fulfilling all the four conditions
or elements of tort of negligence in case the plaintiff wants to be successful in the lawsuits
against the defendant. Moreover, in case there is clear negligence from the auditors, their
liabilities cannot be reduced.

4AUDITING AND ASSURANCE
Answer to Question 2
Advise to Jack regarding the Information of the Audit of Switch Ltd
American Accounting Association Model Decision-making process
1. Determine the facts
The facts are that Jack is supposed to
provide the senior audit manager with the
information on the material cut-off error that
caused revenue to be materially misstated
by documenting it in the working paper; but
his audit manager, Bruce, told him not to
mention the adjustment related information
in the working papers.
2. Define the ethical issues
Determining whether Jack should provide
the information to the senior audit partner
through documenting the adjustment in the
working paper or he should not do this as
per Bruce is the main ethical issue in this
case which is associated with the ethical
codes and principles of APES 110 (Clayton
& van Staden, 2015).
3. Identify the major principles, rules, and
values
Three APES 110 principles having
association with this case are Integrity,
Objectivity and Professional Behavior.
1) It is mentioned under Subsection 111 of
APES 110 that there must be honesty and
integrity from the auditors’ end in the audit

5AUDITING AND ASSURANCE
American Accounting Association Model Decision-making process
engagement (apesb.org.au, 2020).
2) It is mentioned under Subsection 112 of
APES 110 that audit judgment and audit
opinion must not be compromised by the
auditors as a result of bias, influence or
financial interest (apesb.org.au, 2020).
3) It is mentioned under Subsection 115 of
APES 110 that any situation impairing
auditor’s integrity, objectivity and
independence need to be avoided by the
auditors (apesb.org.au, 2020).
4. Specify the alternatives
This case provides Jack with two
alternatives:
1) Jack will not share the material
misstatement related information with the
senior audit partner by not documenting the
material adjustment in the workin papers.
2) Jack will refuse the order to Bruce of not
documenting the adjustments in the working
papers and will take necesery actions for
sharing the information with the senior audit
partner (Munir & Terry, 2018).
5. Compare values and alternatives All the above-mentioned three APES 110
principles will be violated by Jack in case he
adopts the first alternative. However, by

6AUDITING AND ASSURANCE
American Accounting Association Model Decision-making process
adopting the second alternative, Jack will
maintain honesty and integrity in his
profession; and his professional judgement
and audit independence will not be impaired
under the undue influence of Bruce.
6. Assess the consequences The consequences of the alternatives are as
follows:
1) Adoption of this alternative by Jack will
please the audit client as they will not have
to adjust anything and this will contribute to
the issue of incorrect audit opinion. This
may foster the audit-client relationship in
future, but Jack will be responsible and
accountable for not being honest and
independent in the audit opinion. His act
will be considered as unethical and will be
liable for breaching the principles of APES
110.
2) Adoption of this alternative will ensure
that the senior audit partner receives the
information and appropriate audit opinion is
issued in the presence of necessary
adjustments which may not please Swicth
Ltd. Even if the future auditor-client
relationsip may not foster due to this actios,
Jack will be able in maintaining honesty,
integrity and independence of audit. His

7AUDITING AND ASSURANCE
American Accounting Association Model Decision-making process
audit judgement will not be influenced by
the influence of Bruce and he will not be
responsible for violating any APES 110
standard (Elvy, 2015).
7. Make your decision Since second alternative is the most ethical
action, this needs to be adopted by Jack.

8AUDITING AND ASSURANCE
References
Apesb.org.au. (2020). APES 110 Code of Ethics for Professional Accountants (including
Independence Standards). Retrieved 23 March 2020, from
https://www.apesb.org.au/uploads/home/02112018000152_APES_110_Restructured_Co
de_Nov_2018.pdf
Barker, K. (2015). Negligent Misstatement in Australia-Resolving the Uncertain Legacy of
Esanda: Chapter 13. Ch, 13, 319-344.
Buckley, R. A. (2018). A History of Australian Tort Law 1901–1945: England’s Obedient
Servant?.
Clayton, B. M., & van Staden, C. J. (2015). The impact of social influence pressure on the
ethical decision making of professional accountants: Australian and New Zealand
evidence. Australian Accounting Review, 25(4), 372-388.
Dobson, E. (2015). Negligence. Legaldate, 27(1), 4.
Elvy, H. (2015). Ethics and codes: Where to from here?. Professional Planner, (78), 38.
Goudkamp, J. (2017). Breach of Duty: A Disappearing Element of the Action in
Negligence?. The Cambridge Law Journal, 76(3), 480-483.
Munir, R., & Terry, C. (2018). Accountants and the Ethics of Profit: The Case of the Australian
Retail Industry. Journal of business ethics education, 15, 327-347.
Pappalardo, K. (2015). Duty and control in intermediary copyright liability: An Australian
perspective. In Copyright Perspectives (pp. 241-259). Springer, Cham.
Zipser, B. (2017). An update on civil liability. Precedent (Sydney, NSW), (140), 2.