THE UNIVERSITY OF THE WEST INDIES ST. AUGUSTINE DEPARTMENT OF MANAGEMENT STUDIES ACCT 3043 – AUDITING I Semester One 2021/2022 Group Assignment One Mark Allocation – 10% You are the external auditor of Big Bus Tours Ltd, a company which promotes London tours to England and owns a chain of duty-free shops. You have been auditing the company since it was listed on the London Exchange Commission, 10 years ago. Although the accounts have never been qualified, you are aware that the company has been making losses for the past 4 years because of short-term cash flow difficulties. The company has no long-term loans, and the bank overdraft is near its limit at the end of the financial year. During the financial year, the company upgraded its accounting system to a computer database. A consultant was hired to aid in the correct changeover of files for this system. At year-end, this new system had been in place for 6 months, and the directors report they are happy with the way it is operating. You do not have the expertise to review and evaluate the database management system, so you ask an independent expert to undertake this role. This person concludes that the system appears reliable, and that the changeover was correctly carried out. You have never audited this type of system, so you attend some courses to familiarize yourself with its features. Your firm has a standard work program that you use to test the controls operating within the system. In your review of the minutes of the board of directors' meetings, you become aware that the parent company of Big Bus Tours Ltd (which owns 45 per cent of the shares of the company) is considering making an offer for the remaining shares. This is because the company's share price is trading well below its net asset backing. After your audited 30 June 2020 financial report is published, the takeover offer from the parent company proceeds on the basis of an offer price equivalent to the net asset backing of $1.10 per share (as determined from the financial statements). The takeover results in acceptances of 96 per cent of the issued capital, and compulsory acquisition proceedings have been instituted for the other 4 per cent. While these compulsory acquisition proceedings are being instituted, it is discovered that there were errors in the changeover of the computer system, which resulted in inventory at the dutyfree stores being materially misstated. After the subsequent write-down of inventory, a new asset backing of $0.70 per share is established. The parent company is suing you for alleged negligence for its loss of $0.40 per share. This study source was downloaded by 100000800132727 from CourseHero.com on 06-13-2022 16:48:06 GMT -05:00 https://www.coursehero.com/file/111922049/Credit-Assignment-One-Auditingdocx/ Page 1 of 2 Required c) Assuming you were negligent, explain whether you owe a duty of care to the parent company. Auditors require characteristics such as integrity, due care, good faith, due diligence, and skills to evaluate companies’ financial records as they determine if the records are credible. Essentially, auditors need to uphold their legal duties because, if breached by performing careless acts, they can be found guilty of negligence. As a general rule, any external users of audited statements are immediately owed a duty of care, as they depend on auditors for fair and just opinions. Therefore, auditors should not cause damages or economic loss to a potential user through negligent acts. For this reason, they should perform sensibly to avoid acts or omissions that will affect users. Hence, to decide whether the auditor owes the parent company a duty of care, a three-stage test from the case Caparo Industries Plc v Dickman 1990 can be taken into consideration. This test includes foreseeability, proximity, and emphasis on fair and just to impose duty. According to the case given, the auditor did not verify the procedures employed by the experts and relied on them to operate the new systems. As a result, the auditor did not carry out the legal duty of providing assurance. Even though the auditor displayed efforts to enhance skills, there is a high chance of being considered negligent while performing duties. Also, the auditor was not knowledgeable about the potential user (the parent company of Big Bus Tours Ltd), but it is known that a duty of care is owed to any external users of audited records. In conclusion, if the auditor is found guilty of negligence, a duty of care is owed to the parent company as foreseeability and proximity are present in the case. In addition, the auditor can be held liable for a breach in the duty of care and sued for material misstatement, which cost the parent company a financial loss. This study source was downloaded by 100000800132727 from CourseHero.com on 06-13-2022 16:48:06 GMT -05:00 https://www.coursehero.com/file/111922049/Credit-Assignment-One-Auditingdocx/ Powered by TCPDF (www.tcpdf.org)
