audit case study
3. a) Three parties that auditors might be held liable for negligence are :
1. Liability to client (Better Production & Co)
2. Liability to third party who use the information (Usahasama City Bank)
3. Liability to the foreseen user (who rely on the auditor’s financial statement)
b) No. Aiman & Co can not be held liable to Usahasama & Co. The only action available for financial loss caused by a false financial statement was in the tort of deceit. In order to succeed, the claimant (Usahasama) had to prove that Aiman & Co had acted dishonestly. It was not enough to show that the loss suffered by the claimant was reasonably foreseeable. In the case of Hedly Byrne and Co vs Hedler and Partners Ltd, where there was a special relationship between parties, there could be a duty of care for financial loss caused by a negligent misstatement. However, there was a valid disclaimer as the advice given by Heller was headed without responsibility and the defendant was not liable. In this case, Aiman & Co were not liable since there is no special relationship between parties and the advice given by Aiman & Co was headed without responsibility.
4. a) 4 precautions by auditor to avoid/ minimize the consequences of lawsuit :
1. Deal only with clients possessing integrity
2. Obtain an engagement and representation letter
3. Follow the standards of the profession
4. Maintain independence
b) Expectation Gap is the different between the actual and expected performance of an auditor. It can be defined as the difference between what the public and financial statement users believe the auditors are responsible for and what auditors themselves believe their responsibilities are.
Factors contribute to Expectation Gap:
1. Auditor’s Deficient Performance
Deficient performance includes lack of experience, knowledge and care.
2. Deficient Standard
Deficient standard gap is the gap arising due to difference between what auditors can reasonably be expected to do and what they
1. Liability to client (Better Production & Co)
2. Liability to third party who use the information (Usahasama City Bank)
3. Liability to the foreseen user (who rely on the auditor’s financial statement)
b) No. Aiman & Co can not be held liable to Usahasama & Co. The only action available for financial loss caused by a false financial statement was in the tort of deceit. In order to succeed, the claimant (Usahasama) had to prove that Aiman & Co had acted dishonestly. It was not enough to show that the loss suffered by the claimant was reasonably foreseeable. In the case of Hedly Byrne and Co vs Hedler and Partners Ltd, where there was a special relationship between parties, there could be a duty of care for financial loss caused by a negligent misstatement. However, there was a valid disclaimer as the advice given by Heller was headed without responsibility and the defendant was not liable. In this case, Aiman & Co were not liable since there is no special relationship between parties and the advice given by Aiman & Co was headed without responsibility.
4. a) 4 precautions by auditor to avoid/ minimize the consequences of lawsuit :
1. Deal only with clients possessing integrity
2. Obtain an engagement and representation letter
3. Follow the standards of the profession
4. Maintain independence
b) Expectation Gap is the different between the actual and expected performance of an auditor. It can be defined as the difference between what the public and financial statement users believe the auditors are responsible for and what auditors themselves believe their responsibilities are.
Factors contribute to Expectation Gap:
1. Auditor’s Deficient Performance
Deficient performance includes lack of experience, knowledge and care.
2. Deficient Standard
Deficient standard gap is the gap arising due to difference between what auditors can reasonably be expected to do and what they