Report on Professional Negligence of Audit firm.

Report on Professional Negligence of Audit firm
Report on Professional Negligence of Audit firm
Name of the Student
Roll NO
Subject Code

1Report on Professional Negligence of Audit firm
Executive Summary
The report is about an Audit firm which was sued for professional negligence. The company
studied is Harris Scarfe an Australian retail chain located in South Australia. Harris has its head
quarters in Melbourne, Australia. The case study analysises has been done on Harris Scarfe and
it downfall in 2001. What caused the company to remove its stocks from ASX and go in to
bankruptcy. The company faced a debt liability of more than 160 million dollar. The Report
focuses on who all were responsible for the bankruptcy that followed in the company. At the end
the reasons have been stated about why there was misconduct on the part of the auditor and the
management of the company.

2Report on Professional Negligence of Audit firm
Table of Contents
Table of Contents....................................................................................................... 2
Introduction what is Auditing...................................................................................... 3
Financial Reporting Requirements of auditing Standards:..........................................4
Auditing Standards..................................................................................................... 5
Auditor’s professional, legal and ethical responsibility...............................................7
Professional responsibility....................................................................................... 7
Legal Liability.......................................................................................................... 7
Ethical responsibility............................................................................................... 7
Case study.................................................................................................................. 8
The misconduct of the responsibilities of the management and external auditor.10
Internal control...................................................................................................... 10
Independence of the auditors................................................................................10
Audit Committee................................................................................................... 11
Corporate governance........................................................................................... 11
The failure of the auditor to detect the manipulation............................................11
Recommendation.................................................................................................. 12
 classification testing.................................................................................... 12
 Completeness testing.................................................................................. 12
 Cut off testing.............................................................................................. 12
 Occurrence testing-..................................................................................... 12
 Valuation testing.......................................................................................... 12
 Rights and obligations testing......................................................................12
Conclusion................................................................................................................ 13
References............................................................................................................... 14

3Report on Professional Negligence of Audit firm
Introduction what is Auditing
Financial auditing is a process of analyzing the financial records of company to check if
it is lawfully following the rules and regulations according to accounting standards. A listed
company recruits external and internal auditors. To provide independent opinion external
auditors come and analysis the financial records of the company. According to the law every
public company should have an auditing done by external auditors (Jans, and Hosseinpour,
2019).
The audit procedures are divided in to 5 steps. Major auditing firm follows these step to
complete a proper auditing.
Planning: The planning helps the team of auditors to understand the company’s operation,
internal control, its information system these factors help in forming a proper time table and
helps in making auditing strategy (Christopher, Sarens, and Leung, 2009.).
Risk assessment: With the knowledge of the auditor they access to the financial reporting risk.
With a thorough investigation they acknowledge areas that falls under the risky business
circumstances.
Evaluation of internal controls: The auditor’s major duty is to check the internal controls. The
internal control is a key for a robust and more stable organization.
Testing Audit: Tools and technologies like data interrogation tools to check the financial records
from balance sheet transaction receipt (Xu et al., 2011).