Audit Case Analysis: Negligence, Ethics and Financial Reporting

This case analysis examines two situations involving Oscar Edwards Vance (OEV), an auditing firm. The first situation involves Framed Ltd, a client that went into liquidation after OEV provided an unmodified audit opinion. The liquidator discovered fraud by sales representatives, and the case explores OEV's potential negligence in failing to detect the fraud and its liability to Framed and Vic Bank, which extended overdraft terms based on the audited financial statements. The analysis covers the elements of negligence, including duty of care, breach of duty, causation, and damages. The second situation presents an ethical dilemma where an audit senior, Bruce, instructs an auditor, Jack, not to record material adjustments to avoid upsetting a client, Switch Pty Ltd. The analysis explores ethical issues, principles, and values, including integrity, objectivity, and professional behavior, and considers alternatives and consequences. It refers to the IESBA Code of Ethics and emphasizes the importance of ethical decision-making in accounting to maintain the integrity of financial reporting. The analysis concludes with reflections on the importance of ethical principles and the need for alternatives to address ethical dilemmas.

Running head: CASE ANALYSIS
CASE ANALYSIS
Name of the student
Name of the university
Author note

1CASE ANALYSIS
Situation: 1
The plaintiff, in order to succeed the suit for negligence, it must be required to establish
that all components. For example, if the factor is damages, then that indicated that the plaintiff
suffered loss or injury in terms of damages. In that case, the defendant then held to be
responsible. Therefore on the basis of the verdict of the case of negligence, the juries are initiated
to make the comparison of testimony, facts, and evidence for the purpose of determining as to
whether the requisite elements are fulfilled (Doecke, 2015). The elements are duty, breach of
obligation, cause, in fact, proximate cause, damages. The duty in the case of negligence rest on
as to whether the defendant owes an obligation to take care of the plaintiff. The obligation
evolves when the legislation determines the association between the plaintiff and the defendant,
obliging the defendant in the particular case to act in a specific manner. Therefore ordinarily, the
judge determines whether the duty to take care owed by the defendant towards the plaintiff. The
duty is assumed to exist if the prudent person finds the existence of duty under certain situations
(Beran, 2017). The breach of obligation is another significant component of the law of
negligence by which the plaintiff has to establish that the negligent party that is the defendant
violates the duty towards another person. The defendant commits breaches of duty if he fails to
take the standard of care in carrying out his obligation. The cause in fact involve the plaintiff
should establish the action of the defendant is the actual cause of the harm or injury of the
aggrieved person (Foley & Christensen, 2016). The proximate cause connects to the extent of
responsibility of the defendant in the case of negligence. The defendant is only accountable for
the harm that is foreseeable to the defendant through his conduct. Finally, the plaintiff needs to
establish harm or injury that is recognized by law.

2CASE ANALYSIS
In the landmark case of Donoghue v Stevenson [1932] UKHL 100, it held that the
basis of the contemporary negligence law creating general standards of duty to take care. In the
case of Bolton v. Stone [1951], AC 8501All ER 1078 is a leading case of negligence
law that establishes that the defendant is not held to be negligent in case harm or injury to the
plaintiff was not foreseen as the consequence of action. In the case of Hedley Ltd v. Heller
& Partners Ltd [1964], AC 465 is the English case of the law of tort on the financial loss
resulting from negligent misstatement. In the case of Deloitte & Touché v. Livent Inc., 207 SCC
63 is the landmark case concerning the obligation of care that the auditors have towards the
client at the time of professional engagement. In the case of Esanda Finance Corporation Ltd v.
Peat Marwick Hungerford’s, it was held by the high court of Australia concerning the obligation
of auditors to the third parties. In the case of Scott v. McFarlane, it was held that the auditor was
responsible for damages concerning the act of negligence to the third parties who rely on the
auditing report.
Oscar Edwards Vance is an accounting firm having its office throughout Australia. It is
an auditing firm, and most clients operate in service industries and manufacturing. Framed Ltd is
the wholesaler and sold the products to the retailers. Framed went in liquidation as the company
failed to pay its unpaid debts. The Framed liquidator found that fraud had been committed by
Framed sales representatives who do the same for attaining sales incentives. Therefore OEV
takes the obligation to supervise the auditing process. However, the company fails to carry out
his obligation that amounting to gross negligence. Thus the liquidator of the company of Framed
is seeking compensation from OEV. The damages are claimed by them on the ground of the
negligent conduct of OAV. OAV fails to exercise reasonable care in detecting fraud that is
carried out in the company of Framed.

3CASE ANALYSIS
The defendant, OEV, can reduce liability under the law of negligence by establishing the
possible defenses that involve the following. The defendant can question the status of the
plaintiff or also the standard of care that adheres to it (Dobson, 2015). The defendant can assert
that he acted in pursuance to a requisite reasonable duty of care. Another method is hitting the
causal connection between omission or act and injury or harm.
Vic bank had also expanded the terms of overdraft to the company Framed by reliance on
the audited economic statements. Therefore the loss incurred by Vic bank is due to the negligent
act of OEV. Thereby Vic bank is also entitled to claim damages in terms of compensation from
OEV. In this case, the plaintiff has to establish that is the causal connection between the act of
the defendant and harm or injury incurred by the plaintiff. In addition to that, Vic, the bank,
needs to establish that OEV owed a duty of care but had failed to perform his duty resulting in
which they incurred the loss.
Situation: 2
Facts
During the auditing process in Switch, it has been discovered that material cut off error
creates the revenue to be overstated materially. The policy of the auditing firm OEV is to record
the material adjustment in working paper. The final determination is made by a senior auditing
partner, Bruce. Bruce told Jack, who is working on an audit of Switch Pty Ltd, not to refer the
adjustment in working papers, and they did not desire to upset important clients.

4CASE ANALYSIS
Ethical issues
The professional accountant has the ongoing obligation in the maintaining od
professional skill as well as knowledge at the rank that is necessary to guarantee that the
employer or client obtain skilled services from the professionals (Martinov-Bennie &
Mladenovic, 2015). The same is rest for the contemporary changes of legislation, practices, and
techniques. The professional accountant must act in the diligence manner in addition to that in
pursuance with relevant professionals and technical standards at the time of facilitating
professional services.
Principles, rules, and values
The accountant deals with an extensive range of sensitive and privileged data in the
regular task. Because they operate with the numbers that may have repercussions concerning
stock prices and bonuses, they often encounter ethical issues in accounting, and the dilemmas
involve payroll confidentiality, interest conflict, management pressure for inflating earning,
financial statement manipulation (West, 2018). Therefore ethics in the context of accounting are
the focus of the method to take moral and good choices in respect of presentation, preparation as
well as disclosing financial information. The impact of financial reporting that is misleading may
enhance the stock price of the company in the short term. However, the same put the negative
impact on the process that is in the long run. The short term concentrates on finance of the
corporation and is termed as myopic management.
The major ethical principle, values, and rules of the professional accountant involve
integrity, objectivity, due care as well as competence, confidentiality, professional behavior. The
code of ethics creates the conceptual framework in respect of a professional accountant for

5CASE ANALYSIS
guaranteeing compliance with the primary ethical principles. IESBA formerly the Ethics
Committee issued a “Code of Ethics” for the professional accountant. The professional
accountant must be honest, straightforward in the business relationship (Cameron & O'Leary,
2015). He should not permit undue influence or bias of others.in addition to that, the professional
accountant should esteem the confidentiality of data obtained by him in the course of business
relationship or profession. He should not disclose information to the third party unless have the
legal authority to do the same.
Alternatives
A professional accountant is confronted regularly concerning moral dilemmas and ethical
choices during the period of professional activities. Therefore the following alternatives cater to
address the ethical issues. The enforcement and regulation needs include enhancement in
existing statutes as well as policies at professional and government levels. They are therefore
strengthening safeguards to the whistleblowers in addition to that simplification of the
accounting standards, upholding breach of ethics investigation services. The training and
education needs involve the development of experience to deal with the complex ethical
situation. The mentoring needs and advice enhance the obtainability of service of professional
advice, coordination among state, national or regional mentoring network along with that peer-
to- peer group of resolution.
Values and alternatives
The healthy finance structure needs the accounting professionals to commit to moral and
ethical values. Therefore any unethical behavior leads to failures in economic structure (Hoggett

6CASE ANALYSIS
et al., 2018). It is suggested by ethical education as an alternative to advance ethical decision and
awareness. It is regarded as an effective antidote to bad practices of accounting.
Consequence
The ethical professionals create avenues through the impact of alternative action. So the
ethical guidelines can demonstrate and inclined to the comprehension of their conduct. The
consequences are examined on the basis of critical and rational philosophy to create a code of
conduct.
Reflection
Thus according to my opinion, as the significance of the professional, ethical principles is
connected to the immunity of the clients and professionals and also clarify the obligation.
Therefore it is necessary to establish alternatives to combat with the ethical issues and dilemmas
that encounter by the professional in order to make a sound ethical decision.

7CASE ANALYSIS

8CASE ANALYSIS
Reflection
Beran, R. G. (2017). Concussion-A Question of Negligence. MEDICINE AND
LAW, 36(4), 121-128.
Cameron, R. A., & O'Leary, C. (2015). Improving ethical attitudes or simply teaching
ethical codes? The reality of accounting ethics education. Accounting
Education, 24(4), 275-290.
Dobson, E. (2015). Negligence. Legaldate, 27(1), 4.
Doecke, A. (2015). Safeguards for the victim and the accused in criminal law and the
protection of human rights in criminal trials in Australia. Legaldate, 27(1), 2.
Foley, M., & Christensen, M. (2016). Negligence and the Duty of Care: A Case Study
Discussion. Singapore Nursing Journal, 43(1).
Hoggett, J., Medlin, J., Chalmers, K., Beattie, C., Hellmann, A., & Maxfield, J.
(2018). Accounting. Wiley.
Martinov-Bennie, N., & Mladenovic, R. (2015). Investigation of the impact of an ethical
framework and an integrated ethics education on accounting students’ ethical
sensitivity and judgment. Journal of Business Ethics, 127(1), 189-203.
West, A. (2018). After virtue and accounting ethics. Journal of Business Ethics, 148(1),
21-36.