- 10 Marks
Question
Priscilla Publications
Priscilla Publications (Priscilla) is a long-established publishing company. In the last two years, it has made significant losses as a result of its investment in technology and in particular, the high-tech environment of e-commerce. This investment and the company’s sound future prospects have led to a good Stock Exchange rating since they are generally seen as leading edge in this field, with good preliminary sales and strong feedback on the ease of use and marketability of their website.
Priscilla’s investments have been funded through use of their reserves built up over many years. However, two weeks ago, Priscilla’s shares were suspended, having fallen by 90% on rumours that reserves had been significantly overstated and that they were no longer financially viable. Your firm, as the auditors, has come in for significant criticism and is being accused of negligence. Your firm is also being threatened with legal action in relation to the lack of due care in preparation of the financial statements.
Required:
Explain the legal position of your firm, the requirements for due care and the steps and procedures the firm could have taken to prevent such a situation occurring.
Answer
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If your firm has been negligent in the conduct of the audit of Priscilla Publications, it may be liable to Priscilla Publications, and in certain circumstances, to a third party.
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There must be a duty of care, breach of that duty and the breach must cause the loss.
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The firm may be liable to Priscilla because it owes a duty of care to its client and could have caused the loss through breach of duty. Liability to third parties may be limited, for example to shareholders as a body and not to individual shareholders.
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In order to show it had taken reasonable care, the firm would have to demonstrate that it had complied with auditing and ethical standards.
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There should be clear documentation of the audit plan and audit strategy, and evidence of review and supervision. Audit working papers must support the opinion.
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A detailed engagement letter should exist.
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The firm should operate quality control procedures.
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If these procedures have been followed and documented, they could form a defence to the claim.
- Uploader: Salamat Hamid
