ETHICS AND LEGAL ENVIRONMENT

Running head: ETHICS AND LEGAL ENVIRONMENT
Ethics and Legal Environment
Name of the Student
Name of the University
Author’s Note

1ETHICS AND LEGAL ENVIRONMENT
Table of Contents
Answer to Question 1......................................................................................................................2
Introduction..................................................................................................................................2
Outlining All Elements of Tort of Negligence............................................................................2
Likelihood of Success of the Liquidators....................................................................................2
Can Liability of OEV can be reduced..........................................................................................3
Likelihood of Success of VicBank..............................................................................................3
Conclusion...................................................................................................................................3
Answer to Question 2......................................................................................................................4
American Accounting Association (AAA) Model......................................................................4
References........................................................................................................................................8

2ETHICS AND LEGAL ENVIRONMENT
Answer to Question 1
Introduction
Negligence refers to a principle which was originally established in common law and this
has now modified and preserved into legislation. Negligence is developed when reasonable care
and skill is not exercised by a person. In case of auditing, negligence is developed when the
auditors do not exercise reasonable care and skill in audit engagement (Laing & Hoy, 2018).
Outlining All Elements of Tort of Negligence
The Civil Liability Act 2002 is responsible for governing the negligence related claims in
Australia (legislation.nsw.gov.au, 2020). Tort of negligence consists of four elements.
Duty of Care – This element states that OEV has a legal duty of taking reasonable care of the
audit of Framed. In order to sue OEV, Framed needs to prove that there is the existence of duty
of care between it and OEV.
Breach – In case Framed is successful in establishing that OEV owed a duty of care to them, it
will be required to show that this duty of care is breached by OEV.
Causation – This element requires Framed to prove in a negligence claim is causation. More
specifically, Framed needs to shows that its damage or harm came as a result of the breach of
duty of care.
Damages – In case Framed proves duty of care, breach and causation, it will be eligible for
receiving compensation for the damage or harm that has been caused (Davies, 2017).
Likelihood of Success of the Liquidators
Assessing the likelihood of the success of the liquidators of Framed against OEV requires
the consideration the four elements of tort of negligence. First, OEV owes a duty to take
reasonable care to the audit of Framed which establishes duty of care. Second, this duty of care is
breached by OEV because of issuing unmodified audit opinion even when the sales and
receivables were materially overstated; this violates the auditing standard of ASA 700 Forming
an Audit Opinion and Reporting on a Financial Report (auasb.gov.au, 2020). Now, in order to be
successful against OEV, Framed must prove that they had to face certain harm and damage

3ETHICS AND LEGAL ENVIRONMENT
which were caused because of the failure of OEV in its duty of care. Compensation on damage is
largely dependent on this (Kontra, 2019). The likelihood of success of the liquidator is less as not
damage is mentioned in case of Framed.
Can Liability of OEV can be reduced
In general, auditors can adopt three methods in order to reduce the liability arising from
negligence to the third parties. First, they should conduct the audit engagement carefully while
complying with the required standards and principles so that the scope of negligence can be
reduced. Second, they are issue disclaimer of liability in the audit report by mentioning the fact
that they have conducted the audit in best possible manner. Third, they can go into Limited
Liability Agreement before engaging with the audit processes (Luntz et al., 2017). However, in
case of OEV, there is not any mention about these method; and thus, it is not possible for OEV to
reduce the liability to the liquidators of Framed.
Likelihood of Success of VicBank
This situation also requires using the four elements of tort of negligence. Since, VicBank
used the audited financial statements of Framed issued by OEV for extending the terms of
overdraft to Framed, OEV has a duty of care towards VicBank. The issue of unmodified audit
opinion while missing out the major frauds carried out by two of Framed’s sales representatives
contributed to the breach of duty of care; this violates the audit standard of ASA 315 Identifying
and Assessing the Risks of Material Misstatements (auasb.gov.au, 2020). Since material
overstatement was responsible for the liquidation of Framed which made it unable to pay off the
debts of VicBank, the damage of VicBank is the result of breach of duty of care by OEV. This
qualifies VicBank for compensation and increases the chance of success against OEV
(Goudkamp & Ihuoma, 2016).
Conclusion
Consideration of the elements of tort of negligence is crucial for assessing whether the
plaintiff will be successful against the legal cases against the defendant. The rate of success
increases when there is breach of duty of care and this causes harm to the plaintiff.

4ETHICS AND LEGAL ENVIRONMENT
Answer to Question 2
American Accounting Association (AAA) Model
American Accounting Association Model Decision-making process
1. Determine the facts
Jack was told by his audit manager, Bruce,
not to document the material cut-off error
causing revenue overstatement in the
working paper although the policy is to
document any material adjustment in the
working papers so that the senior audit
partner can make the final decision.
2. Define the ethical issues
The ethical issue in this case is to assess
whether Jack should not document the
material adjustment in the working paper by
agreeing with Bruce or he should do the
opposite by complying with the policy of
OEV. The principles and standards of APES
110 are needed to use for assessing the
situation (apesb.org.au, 2020).
3. Identify the major principles, rules, and
values
Professional behavior, integrity and
objectivity are the most relevant principles,
rules and values associated with this case.
APES 110, Subsection 115 put the
obligation on the auditors in maintaining
distance from any situation affecting audit
integrity and objectivity. APES 110,
Subsection 111 ask the auditors to be honest

5ETHICS AND LEGAL ENVIRONMENT
American Accounting Association Model Decision-making process
and straightforward in the profession. APES
110, Subsection 112 ask the auditors not to
involve in any bias, influence or conflict of
interest which can lead to issue
inappropriate audit opinion (apesb.org.au,
2020).
4. Specify the alternatives
There are two alternatives available to Jack
in this situation. First, he can agree with
Bruce and does not document the material
adjustment in the working paper. Second,
He does not agree with the idea of Bruce not
documenting the material adjustments in the
working papers and takes necessary help
from higher authorities (Elvy, 2015).
5. Compare values and alternatives
Adoption of the first alterative will
contribute to the violation of integrity,
objectivity and professional behavior
principles of APES 110. However, all these
three principles or standards of APES 110
are possible to be maintained in case Jack
adopts the second option (apesb.org.au,
2020).
6. Assess the consequences In case of the first alternative, due to not
documenting the material cut-off error
related material adjustments of revenue in

6ETHICS AND LEGAL ENVIRONMENT
American Accounting Association Model Decision-making process
the working paper, appropriate audit opinion
will not be conveyed by the senior audit
partner. Therefore, favorable opinion will be
provided to Switch Pty Ltd in the absence of
any adjustments which will foster the
auditor-client relationship in long-run.
However, Jack will be responsible for
breaching the audit ethical principles of
APES 110 and Jack will feel guilty for not
being professional, ethical, and honest and
integrated in the profession (apesb.org.au,
2020).
In case of the second alternative, due to
documenting the material adjustments of
revenue in the working paper, senior audit
partner will makes such audit report that
will be highly unfavorable for the audit
client, Switch Pty Ltd as there will be
adjustments. This may largely hamper the
future auditor-client relationship between
OEV and Switch Pty Ltd; and there could be
strict actions against Bruce. At the same
time, no auditing ethical principle of APES
110 will be violated by Jack as he will be
taking the correct path as accepted by the
audit profession. This will maintain his
honesty, integrity, straightforwardness and

7ETHICS AND LEGAL ENVIRONMENT
American Accounting Association Model Decision-making process
professionalism (apesb.org.au, 2020).
7. Make your decision
Therefore, Jack is advised to select the
second alternative which maintains audit
ethics and will not involved in violating any
APES 110 principles.

8ETHICS AND LEGAL ENVIRONMENT
References
Apesb.org.au. (2020). APES 110 Code of Ethics for Professional Accountants (including
Independence Standards). Retrieved 20 March 2020, from
https://www.apesb.org.au/uploads/home/02112018000152_APES_110_Restructured_Co
de_Nov_2018.pdf
Auasb.gov.au. (2020). Auditing Standard ASA 315 Identifying and Assessing the Risks of
Material Misstatement through Understanding the Entity and Its Environment. Retrieved
22 March 2020, from
https://www.auasb.gov.au/admin/file/content102/c3/ASA_315_Compiled_2015.pdf
Auasb.gov.au. (2020). Auditing Standard ASA 700 Forming an Opinion and Reporting on a
Financial Report. Retrieved 22 March 2020, from
https://www.auasb.gov.au/admin/file/content102/c3/ASA_700_Compiled_2019-FRL.pdf
Davies, P. S. (2017). Interpretation and Rectification in Australia. The Cambridge Law
Journal, 76(3), 483-486.
Kontra, S. (2019). The duty of care in negligence [Book Review]. Flinders Law Journal, 21(1),
121.
Luntz, H., Hambly, D., Burns, K., Dietrich, J., Foster, N., Grant, G., & Harder, S. (2017). Torts:
cases and commentary. LexisNexis Butterworths.
Goudkamp, J., & Ihuoma, M. (2016). A tour of the tort of negligence. James Goudkamp and
Melody Ihuoma,‘A Tour of the Tort of Negligence’(2016), 32.
Laing, G. K., & Hoy, S. (2018). A Retrospective of Professional Liability of Auditors in
Australia. The Journal of New Business Ideas & Trends, 16(1), 44-55.
Elvy, H. (2015). Ethics and codes: Where to from here?. Professional Planner, (78), 38.
NSW legislation. (2020). Legislation.nsw.gov.au. Retrieved 22 March 2020, from
https://www.legislation.nsw.gov.au/#/view/act/2002/22/part1a/div3/sec5d