Case Study Analysis: Auditing of Framed Ltd. - ACC 568

This case study analyzes the auditing of Framed Ltd., a wholesaler facing cash flow issues and fraudulent financial reporting. The case examines the auditor's negligence in failing to identify misstatements and the resulting legal consequences. It explores the elements of negligence, including cash flow problems and overstated sales, and discusses the liquidator's action against the auditing firm, Oscar Edward Vance (OEV). The study also applies the American Accounting Association's decision-making process to identify ethical issues, principles, and alternatives. It assesses the consequences of the auditor's actions and provides recommendations for improving audit practices. The analysis highlights the importance of ethical standards, auditor credibility, and the need for auditors to maintain independence and integrity to protect the interests of shareholders and prevent financial fraud. The case underscores the potential liability of auditors when they fail to identify material misstatements and provide unmodified opinions despite significant financial issues. This case is from a student and is published on Desklib.

Running head: CASE STUDY - AUDITING
CASE STUDY – AUDITING
Name of Student
Name of University
Author’s Note

1
CASE STUDY - AUDITING

2
CASE STUDY - AUDITING
QUESTION 1:
As per the case study, Oscar Edward Vance is the auditing firm who takes care of the
audit of Framed Ltd. As per the report provided by Jack, that there are several points that Oscar
Edward Vance, the auditor of Framed Ltd failed to identify from their financial report. These
unidentified fraudulences are termed as tort of negligence. The elements of the tort of negligence
are as follows:
 Cash Flow Issue:
As per Jack, who is the senior auditor of Oscar Edward Vance, states that Framed
Ltd. was facing the cash flow issue for last two years. It is highlighted by Jack that the
business entity was facing cash flow management issue. It can be observed that the
disruption in the cash flow statement does not affect the financial statements of the
company (Arens, Elder & Beasley, 2016). It is only possible when the there is a chance
of misstatement.
 Sales:
As per the sales data provided by the company regarding sales in the financial
statements were false. Thus, the sales data in the financial statements were overstated.
As the case study, the liquidator of Framed Ltd. filed a case against the Oscar Edward
Vance, which was the auditing company of Framed Ltd. It is the liquidator who identified the
fraud that was carried out by the sales personnel of Framed Ltd. As per the liquidator the one
who should be blamed is the auditor of the company. As per the liquidator, it is the auditor who
should identify the problem, as they are responsible for overseeing the financial statements of the
company. As per liquidator the auditor of Framed Ltd. failed to achieve that. They failed to

3
CASE STUDY - AUDITING
identify the struggle that the company was going through with the cash flow and the sales value
in the income statement of the company and provided unmodified opinion. Thus, it can be safely
stated that the liquidator of Frame Ltd. will succeed in their action against Oscar Edward Vance.
As per the case study it can be clearly seen that Oscar Edward Vance will not be able to
reduce their liability to the liquidator of Framed Ltd. As the passing of the unmodified opinion in
spite of having such problem in the financial statements led to the downfall of the company. If
the auditor would have identified the problems or the fraudulences that are occurring in the
company then they could have save the investor’s interest, which is the prime job for any auditor
(Cohen & Simnett, 2015). If they would have been identified before then the company could
have save themselves from such situation.
Another major reason that also can be identified is that the employees of the auditing
company are involved in the fraudulency act. Due to the absence of the proper corporate
governance in the company the auditing company failed to identify the problems, which
ultimately became the reason behind the downfall of Framed Ltd.
Thus, it can be stated that there are no such way through which the auditing company of
Framed Ltd could reduce their liability to the liquidators of Framed Ltd.
As per the case study it can be observed that VicBank has no agenda to victimise Oscar
Edward Vance, the auditing firm of Framed Ltd. The overdraft of the bank was almost paid by
the management of Framed Ltd. The management of Framed Limited may have direct
relationship with the VicBank, but Oscar Edward Vance, who is the auditor of Framed Ltd. does
not hold any direct relationship with bank. Thus, bank has no obligations to accuse Oscar
Edward Vance, the auditor.

4
CASE STUDY - AUDITING

5
CASE STUDY - AUDITING
QUESTION 2:
AMERICAN ACCOUNTING
ASSOCIATION MODEL
DECISION-MAKING PROCESS
1. Determine the facts 1. The company used fraudulency in
representing the value of material cut-off. This
enabled the company to overstate the revenue
of the company (Kend, Houghton & Jubb,
2014).
2. The entity is not reluctant to make any
adjustments, which is also a matter of concern,
as the shareholder’s interests are comes under
threat.
3. The major fraudulency made by the auditor
is not mentioning about the changes of the
financial statements made by the entity. This
compromises the shareholder’s interests.
2. Define the ethical issues There are several ethical issues that an auditor
needs to consider while conducting auditing. In
this case the auditor, Oscar Edward Vance,
reluctantly followed the unethical practice, to
avoid the material misstatement of the
company. For the sake of losing the client, this
auditing company deliberately compromises

6
CASE STUDY - AUDITING
the shareholder’s interests.
3. Identify the major principles, rules, and
values
There are many principles, rules and values
that identify and determine the genuineness of
the auditor and auditor’s report. Some of the
principles or rules are as follows:
 In order to maintain the authenticity of
the auditor’s report, the auditor needs to
maintain the ethical standards, so that
report can meet the shareholder’s
interest.
 The auditor also needs to maintain the
credibility of the auditor’s report, so
that the auditor can provide authentic
report.
 The auditor should be a keen observer,
as they needs to identify any kind of
material misstatement that may present
in the financial statements of the
company.
 The auditor needs not to favor or keep
any kind of favoritism with their client.
 The auditor should also follow the
auditing and accounting standards, so

7
CASE STUDY - AUDITING
that the genuineness of the report
should remain intact.
 The auditor should also follow integrity
while completing the audit of any
company.
 The auditor also needs to avoid
resolution of ethical conflicts.
 The auditor should avoid any kind of
advertising and publicity.
 The auditor’s opinion should also be
correct and authentic, so that the
shareholders and other investors of the
company can get a clear picture.
4. Specify the alternatives As mentioned by the ICAEW Audit and
Assurance Faculty in 2006, an alternative to
audit based on the idea of limited assurance. It
was introduced by International Auditing and
Assurance Standards Board (IAASB). As per
this report the shareholders or the investors
need review practical experience of providing
the ICAEW Assurance Service over the
subsequent two years and views of users of

8
CASE STUDY - AUDITING
financial information that help in assessing the
relevance of the service to their needs. Thus,
the shareholders of Switch Pty Ltd can run this
test, so that they can get exact information
about the auditor.
5. Compare values and alternatives There are many differences between the values
and the alternatives of audit. When the auditor
performs the auditing of any entity then the
auditor needs to follow the values (Leung, P.,
Coram, P., Cooper & Richardson, 2015). On
the other hand, if the auditor follows the
alternatives then the auditor needs to access the
last two year experience.
6. Assess the consequences The main consequences that can identify are
that business entity needs to depend on the
previous two year data. If the data was being
fabricated then the company cannot bring out
the authentic data, which will ultimately affects
the report and also compromises the
shareholder’s interest.
7. Make your decision After analysing the above mentioned data it
can be stated that the shareholders and the
investors’ needs to put up a request for

9
CASE STUDY - AUDITING
changing the auditor or can also asked the
company to change the team of the auditor.
REFERENCES:
Arens, A. A., Elder, R. J., & Beasley, M. S. (2016). Auditing and Assurance Services, Global
Edition. Pearson Education UK.
Arens, A., Elder, R., & Beasley, M. (2014). Auditing and assurance services-An integrated
approach; includes coverage of international standards and global auditing issues, in
addition to coverage of. Boston: Aufl.
Cohen, J. R., & Simnett, R. (2015). CSR and assurance services: A research agenda. Auditing: A
Journal of Practice & Theory, 34(1), 59-74.
Kend, M., Houghton, K. A., & Jubb, C. (2014). Competition issues in the market for audit and
assurance services: Are the concerns justified?. Australian Accounting Review, 24(4),
313-320.
Leung, P., Coram, P., Cooper, B. J., & Richardson, P. (2015). Modern auditing and assurance
services. John Wiley & Sons.