Auditing Negligence Case Analysis

This auditing assignment, titled 'Auditing Theory and Practice: Second Report', examines the potential for a negligence case that Oasis could bring against MYH (Morgan fertilizers). The report delves into the legal framework surrounding auditor negligence under common law, considering factors like privity, foreseen persons, and reasonably foreseeable third parties. It analyzes the specific scenario presented and concludes on the strength of any potential negligence claim against MYH, referencing relevant case law such as Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1997).

Auditing Assignment 1
Auditing Theory and Practice: Second Report

Auditing Assignment 2
Executive Summary
The second report is based on the discussion of legal issues present the in the given scenario. It
has emphasized on the strengths of negligence case that Oasis may bring against MYH. It has
been find out from report that Oasis may bring the negligence case against MYH. An auditor has
the duty of due care, but cannot be a guarantor or insurer for 100% accuracy of financial
statements. But it is also true that if Auditor has tried to hide some facts or information about key
accounts of its client organization, then he might be held liable for damages from its audit
results.

Auditing Assignment 3
Table of Contents
Executive Summary.........................................................................................................................2
Influences of Common Law on Negligence Issues:........................................................................4
Conclusion.......................................................................................................................................6
References........................................................................................................................................7

Auditing Assignment 4
To: Managing Partner of MYH
Subject: A Report on Strength of any Negligence Case that Oasis might bring against MYH
Main Body:
Influences of Common Law on Negligence Issues:
There are four general stages of audit-related dispute. The first stage includes the occurrence of
events that results in losses for users of the financial statement like misappropriation of assets,
fraudulent financial reporting. The second stage, this involves investigation by plaintiffs and
their attorneys before doing any legal proceedings. The third stage includes the legal process.
The last stage is related to the resolution of dispute (Wilson, 2014). Under common law, the
auditor is held liable for the negligence, breach of contract and fraud. The elements necessary for
making an auditor’s liability for negligence to clients are the duty to cope up with a required
standard of care, failure to perform as per that duty, a casual connection between auditor’s
negligence and client’s damage and actual damage to the client.
The three standards that have evolved for defining the extent of the auditor’s liability to third
parties are privity, foreseen persons and reasonably foreseeable third parties. Privity means
obligations between parties that exist under a contract. Auditor’s liability to third parties under
common law is complex, because court rulings are not always consistent across federal and state
jurisdictions (American Accounting Association, 2016; Gay and Simnett, 2015). Contributory
negligence is used by the auditor as a defense in legal liability, when he or she claims the client a
responsibility in the legal case. For example, the auditor claims that the client contributed to the
fraud by not correcting the material mistake (Robertson and Tilbury, 2016). Any third person,
who makes any purchase based on the information in the financial statement, then the third
person can sue the auditor for the wrong information given in financial statements.

Auditing Assignment 5
In this case Morgan fertilizers supplied the financial statements to Oasis and there is no evidence
that MYH is aware of this intended use of the accounts. So this works as an advantage for MYH
in the negligence case. There are some steps at the firm level that can minimize the legal liability
against the auditors like, being alert for risk factors that may result in lawsuits, performing and
documenting work diligently, following sound client acceptance and retention procedures,
ensuring that members of the firm are independent, instituting sound quality control and review
procedures (BLINK, 2017). The auditor’s legal liability to client can arise from the failure of
auditor to fulfill the terms of contract. An example would be if the client identifies any
misstatement in the financial statements, which would have been discovered if the auditor had
not properly analyzed all the financial accounts (e.g. misstatement of inventory arises only if the
inventory is not properly checked by the auditor). Case Law: Esanda Finance Corporation Ltd v
Peat Marwick Hungerfords (1997) 188 CLR 241 (HCA)
The auditor’s liability to third party under the common law arises from any loss incurred to third
party due to relying upon the misleading financial statements. Civil liability under the securities
act, 1933 provides the right to the third party to sue the auditor for damages done to him due to
any untrue statement of material. For example if any stock is purchased by an investor on the
basis of audited financial statements and later on if the investor finds the misstatement in the
financial statements, then for the loss done to him he can sue the auditor (Mintz, 2016). If the
company will say that it does not have any evidence of the misleading that happens in the
inventory, then it clearly shows the negligence of the auditors and the management of the
company both.

Auditing Assignment 6
Conclusion
From the analysis of above report, it can be said that during the audit process, the influences of
common law on negligence issues plays an important role. It will help the company, if Oasis files
any negligence case against it. Auditor is expected to conduct an audit using due care, but does
not claim to be a guarantor or insurer of financial statements.

Auditing Assignment 7
References
BLINK (2017). Making Ethical Decisions: A 7-Step Path. Retrieved from:
https://blink.ucsd.edu/finance/accountability/ethics/path.html
Gay, G. E. and Simnett, R. (2015). Auditing and assurance services in Australia (6th ed.).
Roseville: McGraw.
Mintz, S. (2016). Ethical Obligations and Decision-Making in Accounting: Text and Cases.
Robertson, A. and Tilbury, M. (2016). The Common Law of Obligations: Divergence and Unity.
USA: Bloomsbury Publishing.
Wilson, R.M.S. (2014). The Routledge Companion to Accounting Education. USA: Routledge.