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Questions & Answers On The Case Of Audit Assignment


Task: Question 1
Based on the information provided by Jack in relation to Framed Ltd, and making reference to specific common law and/or auditing standards, prepare a report which addresses the following:

  • An outline of all the elements of the tort of negligence;
  • Whether the liquidators of Framed are likely to succeed in their action against OEV;
  • Whether OEV can reduce their liability to the liquidators of Framed; and
  • Whether VicBank is likely to succeed in their action against OEV.

Question 2
Making reference to the Code of Ethics for Professional Accountants, advise Jack as to what he should do in response to the information he has provided regarding the audit of Switch Ltd. Use the following American Accounting Association (AAA) Model template to guide your response.

American Accounting Association Model

Decision-making process

1. Determine the facts

The facts are ...

2. Define the ethical issues


3. Identify the major principles, rules, and values


4. Specify the alternatives


5. Compare values and alternatives


6. Assess the consequences


7. Make your decision



Question 1
Elements of the tort of negligence
Australian Accounting Standard, Auditor General Act 1997, Public Governance, Performance and Accountability Act 2013 these are considered as common law applied in the present case (Legislation and standards (2020). For the establishment of a negligence case, the following elements illustrated in the below section of audit assignment should be present –

Duty – The initial elements, which is considered while ascertainment of negligence is whether there is the presence of duty of care between defendant and plaintiff (Maksymov, & Nelson, 2017).

Breach – It has taken place when the defendant breached the legal duty by acting in such a manner or incapable to act.

Causation – The activity or no activity of the defendant results in actual injury to the plaintiff.

Damages – Due to the action of the defendant, the plaintiff has to suffer from severe damages (Barr-Pulliam, Brown-Liburd, & Sanderson, 2017).

Action against OEV by liquidator of Framed
The liquidator of Framed can take action against OEV only if the following criteria mentioned in the below section of audit assignment would be satisfied –

  • An auditor must be owed a duty of care towards the plaintiff. The claimant should be probable users of the financial statement.
  • The duty of care is breached by the auditor, if they fail to follow the auditing rules or auditing standard while carrying auditing activities (Brasel, & 2016).
  • There should be an actual loss to the plaintiff because of the breach.
  • It is required by the plaintiff to prove that loss is directly related to the negligence of auditor (Bigus, 2016).

In the present case of audit assignment, it has been seen that auditor have a duty of care towards liquidator of Framed ltd. The auditor has to verify the accuracy of the financial records and obtain reasonable assurance whether the financial statements are free from material misstatement whether due to fraud or error. Further, the auditor also provides opinion on whether the company is capable of running its business in the near future. It the present situation it has been seen that the amount of sales and receivables are materially misstated and auditor provides unmodified opinion. Due to cash crunch and piling up of receivable there was clear indication of fraud but still same was ignore by the auditor. The company also went into liquidation. On the basis of this, because of negligence conduct auditor was unable to detect fraud and it assists loss to liquidator. Therefore, the liquidator of framed would likely to succeed in their action against OEV.

Reduction in liability of OEV to the liquidator of Framed
If OEV confirms that financial statement of the Framed Ltd is presented fairly against the suitable evaluation criteria. Further, if it has obtains representation from management that all data presented in the financial statement are accurate and proper then in such case liability of the auditor can be reduced.

Action against OEV by VicBank
Since, on the basis of audited financial statement of Framed Ltd, the terms of their overdraft are extended by VicBank. Since, the auditor is responsible for two groups of third parties, namely known users of the financial statement, and a restricted class of foreseeable users. Normally banks rely on the audited financial statement of the company, and therefore because of negligence conduct auditor expressed unqualified opinion even in case of presence of substantial material misstatement (Wright, & Wu, 2018). Based on this, it can be said in this segment of audit assignment that VicBank can also take action against OEV.

Question 2
Table 1 American Accounting Association model

American Accounting Association Model

Decision-making process

1. Determine the facts

The study developed in the audit assignment based on the given case scenario depicts that jack identified the material cut-off error, by which revenue would materially overstate. Jack wants to document any material adjustment in the working paper, however, management of Switch Ltd does not want any adjustment. Further, Bruce also told Jack not to mention any working paper because it assists in disappointment in an audit client, and for meeting deadlines, and they want to complete things very soon.

2. Define the ethical issues

According to Australian Professional and Ethical Standard Board 110- Code of Ethics, it is required by auditor to comply with integrity, objectivity, due care, and confidentiality at the time of audit of financial statement. In the present situation discussed herein audit assignment, the initial aspect is related to the integrity of the auditor. It is required by auditor to express a true and fair opinion on the basis of findings in the financial statement of the company (Zhang, Pei, & Vasarhelyi, 2017). Further, they have an obligation to provide a report for correct information in their reports for investors as well as creditors. Another ethical issue present in this case scenario is related to objectivity. It is required by the auditor that they should be unbiased and impartial at the time of reporting. Along with this, it is the responsibility of the auditor to maintain due diligence at the time of carrying activities (Rodgers, & Al Fayi, 2019). In the given case, even if ascertainment of material misstatement, auditor deny to make any adjustment in working paper and also would not want to upset audit client. All these activities assist in raising objectivity and integrity issues to the auditor.

3. Identify the major principles, rules, and values

This situation explored in the audit assignment creates the connection between plaintiff and defendant of legal duty or the respondent may owe the plaintiff a lawful responsibility to carry their activities with reasonable care. It is the duty of the auditor to express a true and fair opinion on the financial statement only if it is free from material misstatement. Along with this, the audit should be based on professionalism (Schmidt, Wood, & Grabski, 2016). Another principle that is required to be followed by the auditor is maintaining impartiality in audit and objectivity (Pratt, & Peters, 2017).

4. Specify the alternatives

As per Auditing Standard 700, auditor can express modified opinion of financial report when they believe that financial statement does not present true and fair view. Therefore, in present case scenario, auditor can express a modified opinion on the financial statement.

5. Compare values and alternatives

All the activities such as ignoring mentioning of adjustment of material error identified by which revenue would be enhanced is not appropriate. Further, for the satisfaction of audit client and completion of task in a quick manner, it is not proper to express an incorrect opinion on the financial statement. Therefore, by expressing a modified opinion on the financial statement, the user of financial statement can aware about such misstatement in the financial reports (Farooq, & De Villiers, 2017).

6. Assess the consequences

As per ASA 710, it is noted herein audit assignment thatauditor should take into account the prior period audited financial statement for expressing opinion on current financial statement. Therefore, the consequences of this alternative is even if prior auditor would terminate, then also newly appointed auditor would consider prior period audited financial statement and ask from management regarding reasons modified opinion on the financial statement.

7. Make your decision

Based on the above aspects provided within this audit assignment, it has been decided that modified opinion should be expressed on the financial statement. Since, financial statement are not free from material misstatement, therefore by application of ASA 700 modified opinion should be expressed on financial statement.

Barr-Pulliam, D., Brown-Liburd, H. L., & Sanderson, K. A. (2017). The Effects of the Internal Control Opinion and Use of Audit Data Analytics on Perceptions of Audit Quality, Assurance, and Auditor Negligence. Audit assignment Assurance, and Auditor Negligence (August 17, 2017).

Bigus, J. (2016). Optimism and auditor liability. Accounting and Business Research, 46(6), 577-600.

Brasel, K., Doxey, M. M., Grenier, J. H., & Reffett, A. (2016). Risk disclosure preceding negative outcomes: The effects of reporting critical audit matters on judgments of auditor liability. The Accounting Review, 91(5), 1345-1362.

Farooq, M. B., & De Villiers, C. (2017). Assurance of sustainability and integrated reports. In Sustainability Accounting and Integrated Reporting (pp. 149-162). Routledge.

Maksymov, E. M., & Nelson, M. W. (2017). Malleable standards of care required by jurors when assessing auditor negligence. The Accounting Review, 92(1), 165-181.

Pratt, S., & Peters, E. (2017). Internal audit: Raising the bar in auditing financial crime risk. Audit assignment Journal of Financial Compliance, 1(3), 237-244.

Rodgers, W., & Al Fayi, S. (2019, April). Ethical pathways of internal audit reporting lines. In Accounting Forum (Vol. 43, No. 2, pp. 220-245). Routledge.

Schmidt, P. J., Wood, J. T., & Grabski, S. V. (2016). Business in the cloud: Research questions on governance, audit, and assurance. Journal of Information Systems, 30(3), 173-189.

Wright, A. M., & Wu, Y. J. (2018). The impact of auditor task difficulty and audit quality indicators on jurors' assessments of audit quality. Behavioral Research in Accounting, 30(2), 109-125.

Zhang, L., Pei, D., & Vasarhelyi, M. A. (2017). Toward a new business reporting model. Journal of Emerging Technologies in Accounting, 14(2), 1-15.


Legislation and standards (2020). Audit assignment Retrieved from


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