Auditing Assignment | Question-Answers

Running Head: AUDITING
AUDITING
Name of the Student
Name of the University
Author Note

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Table of Contents
Question 1..................................................................................................................................2
Elements of Tort of Negligence.............................................................................................2
Liquidators of Framed likely to Succeed in their Action against OEV.................................2
Reduction of Liability by OEV to Liquidity of Framed........................................................3
VicBank Likely to Succeed in action against OEV...............................................................3
Question 2..................................................................................................................................4
Reference....................................................................................................................................7

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Question 1
Elements of Tort of Negligence
Frames was office supplies wholesaler, who was engaged in selling its products to the
retailers all through NSW. Over last two years, the company was running on no profit no
loss. The most significant issue was of cash flow management. However, other than cash
flow, there was reasonable revenue and payables and receivables had been creeping. The
auditing firm OEV, who recently audited the financial statements of Framed and provided
unmodified opinion. Later, the company went into liquidation because of its inability to pay
debts. It has been discovered that major fraud has been carried by the two sales
representatives of Framed Limited by entering falsified sales for achieving their bonuses of
sales. The receivables and sales were materially overstated by the junior member of audit
division. Hence, in this case, the negligence was done by OEV to detect fraud going on in
Framed Limited (Bigus, 2015).
The auditing standard of due professional care applies in this situation. Due
professional care is exercised in planning as well as performance and the preparation of audit.
This requires independent auditor for planning and performing their work with the due
professional care. Further, it imposes the responsibility upon each of the professional within
the organization of independent auditor for observing standards of the field work and
reporting. The auditors are assumed to perform their task successfully and without any error
or fault, they undertakes for the integrity and good faith. Moreover, they are liable for any
kind of negligence, dishonesty or dishonesty (Pcaobus.org. 2020).
Liquidators of Framed likely to Succeed in their Action against OEV
The liquidators of company are likely to succeed in their action against OEV. The
liquidators discovered major fraud carried out by the two sales representatives of the Framed

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Limited has been entering wrong sales for entering bonuses of sales. Further, the junior
member of audit division has done material misstatement on sales and receivables. The
liquidator that acted on the behalf of Framed Limited has claimed OEV that they were
negligent in conducting audits and detecting the fraud that was going on in Framed Limited.
Although, the wrongful act of Framed Limited cannot be denied because of falsifying sales,
however, still OEV held responsible because the auditing firm has failed to detect and there
has been breach of due professional care (Bigus, 2016).
Reduction of Liability by OEV to Liquidity of Framed
OEV could reduce their liability to Framed Liquidators. The auditors of OEV cannot
escape their liability for failing to detect fraud. The liquidators has thrown out negligence
claim that is brought against auditing company OEV for allegedly failing in detecting serious
fraud at Framed limited. The liquidators of company argued that the auditors of company
should have detected fraud, as they had been hired by company for doing this. The auditors
should be aware of what is going on financial statements of their client’s firm. It is duty of
auditor of company to keep checking the changes occurring in the financial statements and
they should bring this to the notice of the management of company (Kertarajasa, Marwa &
Wahyudi, 2019).
VicBank Likely to Succeed in action against OEV
VicBank is likely to success in their action against the OEV. This bank has extended
terms of overdraft to the Framed Limited. VicBank relied on audited financial statement of
Framed provided by OEV. It is because of this reason Vicbank are claiming OEV for the
damages done for the negligence. Although, it is difficult for succeeding in claiming
regarding negligence of auditors for the failure to detect fraud, but in this case, it can be seen
that auditor’s firm had failed in discovering overstatement. Hence, it can be said that OEV

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can be sued because of their failure in spotting fraud against Framed Limited. (Goldie, Li &
Masli, 2018).
Question 2
American
Accounting
Association Model
Decision-making process
1. Determine the
facts
The facts are that there was discovering of material cut-off error by
the audit senior of OEV, Jack that caused the revenue to be
materially overstated. He informed Bruce from his prior discussion
that he has knowledge regarding management of the Switch Pty Ltd.
that they don’t want to make any kind of adjustments. Further, after
finishing off the fieldwork, the audit manager, Bruce said to Jack for
not mentioning adjustments in working paper. Bruce has said to Jack
that Switch has only small number of the shareholders and from
experience he knows that the audit partner will not want to upset
important client and that they are required to finish the things as
early as possible for meeting deadlines (Beck & Mauldin, 2014).
2. Define the
ethical issues
The ethical issues are whether material adjustments should be
documented on the working papers. If Jack listens to what his senior
audit manager is saying and act accordingly, then it would be illegal
act and would be negligent to his professional duties.
3. Identify the The policy of OEV is documenting any of the material adjustments

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American
Accounting
Association Model
Decision-making process
major principles,
rules, and values
in working papers and the final determination was being made by
senior audit partner. However, the senior manager is in no mood to
document material adjustments because client don’t want and he is in
hurry to meet the deadline as early as possible. The values, principles
and norms are that the auditors should have impeccable integrity and
should assure that company is providing fair as well as true view of
its financial conditions at the time of audit. The auditors are
delegated with the task for assuring financial accounts of firm and
anything, which prevents this with the objectivity of auditor is failure
of the duty of auditor to shareholders (IFAC, 2011).
4. Specify the
alternatives
There are two options available. The first option is to listen to the
senior manager for not documenting any kind of material
adjustments in working paper and completing things as early as
possible for meeting deadlines. The second option is to refuse to do
what senior auditor is saying and taking appropriate actions
accordingly against him and against management of client company
(Cao, Chychyla & Stewart, 2015).
5. Compare values
and alternatives
The course of the action that is consistent with values, principles and
norms in step 3 is refuse to listen to senior auditor for not
documenting material adjustments. The auditor Jack will document

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American
Accounting
Association Model
Decision-making process
material adjustments and then he will report this issue to the client’s
company board and inform OEV to take appropriate action against
senior auditor (Bruynseels & Cardinaels, 2014).
6. Assess the
consequences
When option one is opted, then the audit will listen to what his senior
audit is directing him to do that is not to do documentation of
material misstatement in working papers and complete the audit
work as early as possible for meeting the given deadline. If he
accepts thus then he would enjoy increase in his wealth as well as
presumably increase in his living standard but on contrary he would
be exposed to professional risk and legal trouble, if it is uncovered.
However, Jack opts for second option, then he would refuse listening
to senior auditor for doing wrongful act and act accordingly. This
would be having number of the unfortunate consequences for the
relationship between client-auditor. It would enhance and maintain
social standing and reputation of auditors and serves best interest of
shareholders (Kim & Park, 2014)
7. Make your
decision
The ethical decision is opting for option 2. The auditor Jack should
refuse to listen his senior auditor for doing wrongful act.

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Reference
Beck, M. J., & Mauldin, E. G. (2014). Who's really in charge? Audit committee versus CFO
power and audit fees. The Accounting Review, 89(6), 2057-2085.
Bigus, J. (2015). Loss aversion, audit risk judgments, and auditor liability. European
Accounting Review, 24(3), 581-606.
Bigus, J. (2016). Optimism and auditor liability. Accounting and Business Research, 46(6),
577-600.
Bruynseels, L., & Cardinaels, E. (2014). The audit committee: Management watchdog or
personal friend of the CEO?. The Accounting Review, 89(1), 113-145.
Cao, M., Chychyla, R., & Stewart, T. (2015). Big Data analytics in financial statement
audits. Accounting Horizons, 29(2), 423-429.
Goldie, B. A., Li, L., & Masli, A. (2018). Do Mutual Fund Investors Care About Auditor
Quality?. Contemporary Accounting Research, 35(3), 1505-1532.
IFAC. (2011). Revised Code of Ethics - Completed. Retrieved 11 March 2020, from
https://www.ethicsboard.org/projects/revised-code-ethics-completed
Kertarajasa, A. Y., Marwa, T., & Wahyudi, T. (2019). The Effect of Competence,
Experience, Independence, Due Professional Care, And Auditor Integrity On Audit
Qualitiy With Auditor Ethics As Moderating Variable. Journal of Accounting,
Finance and Auditing Studies, 5(1), 80-100.
Kim, Y., & Park, M. S. (2014). Real activities manipulation and auditors' client-retention
decisions. The Accounting Review, 89(1), 367-401.

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Pcaobus.org. (2020). AU 230 Due Professional Care in the Performance of Work. Retrieved
11 March 2020, from
https://pcaobus.org/Standards/Archived/PreReorgStandards/Pages/AU230.aspx