AUDIT CHAPTER 5~

Blogging time!! Hehehe.. please people don’t tell me that I need to study for my final.. I finally found a way to fully make used of my blog in this final exam fever.. I’m going to blog on what I have learned to day, in a way I’m going to recap back the topics I have studied.

My failure to finished up reading economy last night has been write off with my success of completing my first chapter in audit, auditor’s legal liability, chapter 5 (thank you2) J.. My day began at 10 a.m. straight away washed my face and brushed my teeth then put my lazy ass on my study chair. I have to complete at least one chapter of audit this morning.. Last night failure still haunted me. Hehehe, determination is important..

The textbook that we used

Chapter 5

Basically chapter 5 is all about as the title mention auditor’s legal liability.. Under common laws, auditor have responsibility to fulfill contract with clients and honor it.. the failure to do so makes auditor liable to be charged as breach of contract not only by clients and also the 3rd party under the statutory law.. The 3 famous term used in this chapter is business failure, audit failure and also audit risk.

1. Business failure -occur when business is unable to repay back lender or meet investors’ expectation because of poor management.

2. Audit failure - occurs when auditor issued incorrect audit opinion because it failed to comply with the auditing standard.

3. Audit risk - possibility that auditor wrongly about the financial statement, when there are possibility that they are materially misstated.

Basically audit risk is unavoidable.. Because today nature of business which required all companies to involved in complex transaction there are possibility that the financial statements is being manipulated.. And every time when something unpleasant regarding financial statement took placed it was auditor who being blame.. This kind of thing shouldn’t happened (back up auditor as I’m one of the future auditors) The perception that auditor is the guarantor and guarantee the accuracy of financial statement should be changed. There is one concept which was called ‘PRUDENT PEOPLE CONCEPT’, this concept is about an agreement between auditor and the court that auditor will conduct the auditing with due care and follow the auditing standard but there is no such things as expecting the audit to be perfect and free from error. This concept has been used as shield or defense by auditors, which I will explain more further down my writings.

There are two should I called legal terms that attract me. First is joint and several liability. Example of this situation is that auditor can be assessed the entire loss to shareholders if the company is bankrupt and management is unable to pay the debt. This one is soooo unfair!! Why should auditor’s carry the blame?? Dah la fees untuk audit process so cheap, then when you have to pay millions in RM as remedies to the shareholders?? Huh.. The next legal term is Separate and proportionate liability, meaning that if the court determine on 30% of losses is due to auditors’ fault then auditors only need to pay 30%.. This sounds way better than the first one.. J

There are four ways on how auditor can defend themselves from being charged in court :
1. Lack of duty
-CPA firm can claim that they did not offer such services to the company. CPA can used the engagement letter as prove, thus this make the engagement letter one of vital part in doing auditing.
-Example of the situation, a client sue a CPA firm for the misstatement in the receivable ledger, and CPA can claim that they are not responsible in preparing the ledger. They can used engagement letter to further support their claim. Engagement letter carries the duties responsible by the auditors, duties responsible by the clients and a lot more agreement regarding auditing the client.

2. Non negligence performance
- CPA firm can claim that they has done the audit according to the standard auditing. Even a if a fraud is detected, the blame can’t be put on auditors if the auditors follow the standard accordingly.
- Like the prudent people concept, auditor is not a guarantor and do not expect perfection in them doing auditing.
- Audit are done base on auditing standard and subject to limitation and can’t be realized as complete assurance that all misstatement will be found.

3. Contributory negligence
- Exist when auditor claim that clients action resulted in the loss of their business or clients interference while conducting the audit was the cause of the losses.
- For example, if the losses happened because of the weakness in the internal control system and the management has the chance to fix it but they don’t, then the fault should not be put on the auditors. Auditor has the right to used this to get away from being charged by their clients.

4. Absence of causal connection
- To be able to succeed in action against auditor, client must showed that damages they suffered are because of the auditor’s failure In following the auditing standard.
- Example, auditor failed to complete audit on time and this resulted in a bank not to renew their loan with the company and this has cause huge damages to the company.
- Auditor can get away from being charged if they defense themselves by saying that the bank did not renew the loan because of the weaknesses in the financial report of the company which got nothing to do with the auditor and them doing auditing.

Under the liability to 3rd party which include potential and actual shareholders, bankers, vendors and creditors, CPA firm are liable to be sue by these group of parties. But under ultamares doctrine, ordinary negligence is insufficient for liability to 3rd party because of lack of privity of contract between 3rd party and the auditor. Meaning that, only 3rd party that involved in signing the engagement letter are liable under the 3r party. But the world is so jealous of the auditor. Under the foreseen users, any member of limited class of users that the auditor know will depend on the financial statement can be treated as 3rd party which this has make them liable to sue the auditor if any losses occur. Pity the auditor, why can’t the rest of the world just give some space for the auditor to breath?? Haih..

Basically that’s conclude the chapter 5 in audit subject that will come out in the final exam. I will write more if I had the time to study tonight. I need to rush to SIFE meeting for orang asli project, and before that need to pick up malina as harmoni. Owh, I think someone will verbally attack me during the meeting as I’ve been avoiding her since last night. Err, not exactly avoiding it just she didn’t called at the right time J . Let see what she’s going to say tonight. The boat has started moving!!!

-theskyisnevertoohightoaim-