Audit and Assurance Services Report: Ethical and Legal Issues

This report examines the audit and assurance services provided by Oscar Edwards Vance (OEV), focusing on the cases of Framed Ltd and Switch Pty Ltd. It analyzes the elements of tort of negligence, including duty of care, breach of duty, causation, and harm, to assess the potential success of legal actions by Framed's liquidators and VicBank against OEV. The report highlights OEV's failure to identify material misstatements and assess going concern risks, leading to financial losses for stakeholders. Furthermore, the report applies the American Accounting Association's model to address ethical issues related to documenting material adjustments. The analysis includes ethical principles from APES 110, considering integrity, objectivity, and professional behavior, and discusses alternative actions and their consequences. The report concludes by emphasizing the importance of auditors adhering to ethical standards and considering negligence when performing audits.

Running head: AUDIT AND ASSURANCE SERVICES
Audit and Assurance Services
Name of the Student
Name of the University
Author’s Note

1AUDIT AND ASSURANCE SERVICES
Table of Contents
Answer to Question 1.................................................................................................................................. 2
Answer to Question 2.................................................................................................................................. 3
References.................................................................................................................................................. 6

2AUDIT AND ASSURANCE SERVICES
Answer to Question 1
Introduction
This report discusses about the elements of tort of negligence associated with the provided case.
After that, applying the concept of tort of negligence, this report discusses whether the liquidators of
Framed and VicBank would likely to be successful in the legal actions against the auditors of OEV. It also
shows the ways of reducing the liabilities of the auditors.
Elements of Tort of Negligence
Four particular elements of tort of negligence have key relevance with this case; they are Duty of
care, Breach of duty of care, Cause and Harm. Any legal obligation of the auditors towards the clients is
considered as duty of care; and OEV has the duty of care towards Framed to issue the appropriate audit
report based on correct audit evidences (Van Ho & Terwindt, 2019). Any violation of this duty of care is
regarded as breach; and OEV might be chargeable for duty of care as revenue and receivables were
overstated after issuing unmodified audit opinion. In order to be sued for negligence, the auditors must
cause harm to the client or any user of audited financial statements. Framed and others users of OEV’s
audit report might suffer damage or harm due to the wrong audit opinion of OEV (Laing & Hoy, 2018).
Success of Liquidators of Framed
Based on the above-discussion, it can be established that OEV had duty of care to Framed as
OEV was their audit partner. In the provided situation, there was violation in the duty of care as the sales
and receivables were materially overstated even after OEV performed the audit and issued unmodified
audit opinion. At the same time, the auditors were unable in assessing the going concern risk of Framed
and the company was unable to pay off its debts after liquidation. These show that OEV caused harm to
Framed. Since negligence is there from the end of OEV, the success rate is high for the liquidators of
Framed against OEV (Chapple & Mui, 2015).
Minimization of Liability
It was required for the auditors of OEV to take into consideration all the necessary audit evidence
and risk situations in order to avoid being negligent and to recognize the fraud activities by the two sales
representatives of Framed for achieving the sales bonus. This was one major way of reducing their
liabilities to the liquidators of Framed. Apart from this, OEV would have been required to include provision
associated with liability in the audit report of Framed so that they could reduce their liability. However,
both of these methods were not adopted by OEV. For this reason, they do not have any way to reduce
the liability to the liquidators of Framed (Kurihama, 2016).

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Success of VicBank
VicBank was one of the bank lenders of Framed and this made VicBank as a major use of the
audited financial reports of Framed for assessing its liquidity position. This also establishes duty of care of
OEV towards VicBank (Laing & Nickerson, 2018). This duty of care was violated by OEV when their failed
in recognizing the material overstatement in Framed’s sales and receivables due to the fraud carried out
by two sales representatives for bonus; and this wrong audit report affected the liquidity assessment of
Framed by VicBank. For this reason, the bank had to face loss for extending credit to Framed as it was
not able to meet the debt after the liquidation. This establishes auditor’s negligence of duty of care and
increases the rate of success of VicBank against OEV (Backof, 2015).
Conclusion
It can be concludes based on the above discussion that the chance of success of any third party
of any legal actions against the auditors increases when the auditors have duty of care towards the them
and the same is breached by the auditors. This makes necessary for the auditors to take into
consideration the tort of negligence while performing the audit of the clients.
Answer to Question 2
American Accounting Association Model Decision-making process
1. Determine the facts
In spite of the presence of a material cut-off error
causing material overstatement in revenue of
Switch Pty Ltd, Bruce told Jack not to mention
the adjustment in the working paper as he did not
want to upset the audit client and wanted to meet
the work as soon as possible within the deadline.
2. Define the ethical issues Since the policy of OEV is to document any
material adjustments in the working papers, it
would be an unprofessional as well as unethical
act by both John and Bruce not to mention the
revenue material overstatement due to cut-off
error in the working papers. Since APES 110
provides the ethical principles and standards for
the auditors, this action would violate the

4AUDIT AND ASSURANCE SERVICES
American Accounting Association Model Decision-making process
principles of APES 110 (apesb.org.au, 2020).
3. Identify the major principles, rules, and values
1. As per Subsection 111 of APES 110, honesty
and straightforwardness need to be
demonstrated by the auditor while performing
audit so that the whole audit is fair as well as
authentic (apesb.org.au, 2020).
2. As per Subsection 112 of APES 110, audit
opinion as well as audit judgment need to be
compromised by the auditors in the presence of
any bias, conflict of interest and undue influence
(apesb.org.au, 2020).
3. As per Subsection 115 of APES 110, distance
needs to be maintained by the auditors from any
circumstances that can compromise integrity and
objectivity of the whole audit (apesb.org.au,
2020).
All these three principles are at stake in this
particular case of Switch Pty Ltd and OEV.
4. Specify the alternatives Facts of this provided case lead to the
development of two alternatives.
1. This alternative would need Jack not
documenting the material adjustments related to
revenue overstatements in the working paper as
mentioned by Bruce for satisfying the client and
saving time.
2. This alternative would require Jack to
document the material adjustments related to
revenue overstatement in the working paper as

5AUDIT AND ASSURANCE SERVICES
American Accounting Association Model Decision-making process
per the rule of the audit firm.
5. Compare values and alternatives
In line with APES 110, three ethical principles
associated with this case are integrity, objectivity
and professional behavior and it is possible for
Jack to maintain all these principles in case he
complies with the rule of OEV to mention the
material adjustment of revenue in the working
paper which is a professionally correct action.
The first alternative does not have consistency
with these principles of APES 110 as all of these
principles would be violated by not mentioning
the audit adjustments in the working paper
(apesb.org.au, 2020).
6. Assess the consequences
1. Bruce would be able in not upsetting the audit
client that is Switch Pty Ltd and finishing the audit
within deadline in case Jack does not document
the material adjustments related to the cut-off
error of revenue overstatement in the working
paper; but this would lead to the violation of the
above-mentioned APES 110 principles of
auditing by Jack intentionally (apesb.org.au,
2020).
2. The relation between OEV and Switch Pty Ltd
might be negatively affected as Jack would be
documenting the revenue related material
adjustment in the adjustment papers and this
might end up finishing the audit not within the
provided deadline, but there would not be any
violation of the APES 110 ethical principles by
Jack. This would maintain the integrity of the
profession (apesb.org.au, 2020).

6AUDIT AND ASSURANCE SERVICES
American Accounting Association Model Decision-making process
7. Make your decision
The discussion shows that selecting the second
alternative would be the ethical decision that
would require documenting the material
adjustments in the working paper by Jack .
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_Code_Nov
_2018.pdf
Backof, A. G. (2015). The impact of audit evidence documentation on jurors' negligence verdicts and
damage awards. The Accounting Review, 90(6), 2177-2204.
Chapple, L. E., & Mui, G. Y. (2015). Social audit failure: Legal liability of external auditors. In Social Audit
Regulation (pp. 281-299). Springer, Cham.
Kurihama, R. (2016). What is the Social Relationship between Independent Auditors and Stakeholders?:
Fiduciary Relationship. Fiduciary Relationship (August 2, 2016).
Laing, A., & Nickerson, A. (2018). Deloitte & Touche v. Livent Inc.(Receiver of): The Supreme Court of
Canada Affirms Duty of Care but Reduces Auditor's Damages in Livent Decision. Banking &
Finance Law Review, 33(2), 293-297.
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.
Van Ho, T., & Terwindt, C. (2019). Assessing the Duty of Care for Social Auditors. European Review of
Private Law, 27(2), 379-401.