Auditing Theory and Practice for Second Report-myassignmenthelp

Question: Write about theAuditing Theory and Practice for Second Report. Answer: To: Managing Partner of MYH Subject: A Report on Strength of any Negligence Case that Oasis might bring against MYH Main Body: Influences of Common Law on Negligence Issues: There are four general stages of audit-related dispute. The first stage includes the occurrence of events that results in losses for users of the financial statement like misappropriation of assets, fraudulent financial reporting. The second stage, this involves investigation by plaintiffs and their attorneys before doing any legal proceedings. The third stage includes the legal process. The last stage is related to the resolution of dispute (Wilson, 2014). Under common law, the auditor is held liable for the negligence, breach of contract and fraud. The elements necessary for making an auditors liability for negligence to clients are the duty to cope up with a required standard of care, failure to perform as per that duty, a casual connection between auditors negligence and clients damage and actual damage to the client. The three standards that have evolved for defining the extent of the auditors liability to third parties are privity, foreseen persons and reasonably foreseeable third parties. Privity means obligations between parties that exist under a contract. Auditors liability to third parties under common law is complex, because court rulings are not always consistent across federal and state jurisdictions (American Accounting Association, 2016; Gay and Simnett, 2015). Contributory negligence is used by the auditor as a defense in legal liability, when he or she claims the client a responsibility in the legal case. For example, the auditor claims that the client contributed to the fraud by not correcting the material mistake (Robertson and Tilbury, 2016). Any third person, who makes any purchase based on the information in the financial statement, then the third person can sue the auditor for the wrong information given in financial statements. In this case Morgan fertilizers supplied the financial statements to Oasis and there is no evidence that MYH is aware of this intended use of the accounts. So this works as an advantage for MYH in the negligence case. There are some steps at the firm level that can minimize the legal liability against the auditors like, being alert for risk factors that may result in lawsuits, performing and documenting work diligently, following sound client acceptance and retention procedures, ensuring that members of the firm are independent, instituting sound quality control and review procedures (BLINK, 2017). The auditors legal liability to client can arise from the failure of auditor to fulfill the terms of contract. An example would be if the client identifies any misstatement in the financial statements, which would have been discovered if the auditor had not properly analyzed all the financial accounts (e.g. misstatement of inventory arises only if the inventory is not properly checked by t he auditor). Case Law: Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1997) 188 CLR 241 (HCA) The auditors liability to third party under the common law arises from any loss incurred to third party due to relying upon the misleading financial statements. Civil liability under the securities act, 1933 provides the right to the third party to sue the auditor for damages done to him due to any untrue statement of material. For example if any stock is purchased by an investor on the basis of audited financial statements and later on if the investor finds the misstatement in the financial statements, then for the loss done to him he can sue the auditor (Mintz, 2016). If the company will say that it does not have any evidence of the misleading that happens in the inventory, then it clearly shows the negligence of the auditors and the management of the company both. Conclusion From the analysis of above report, it can be said that during the audit process, the influences of common law on negligence issues plays an important role. It will help the company, if Oasis files any negligence case against it. Auditor is expected to conduct an audit using due care, but does not claim to be a guarantor or insurer of financial statements. References BLINK (2017). Making Ethical Decisions: A 7-Step Path. Retrieved from: https://blink.ucsd.edu/finance/accountability/ethics/path.html Gay, G. E. and Simnett, R. (2015). Auditing and assurance services in Australia (6th ed.). Roseville: McGraw. Mintz, S. (2016). Ethical Obligations and Decision-Making in Accounting: Text and Cases. Robertson, A. and Tilbury, M. (2016). The Common Law of Obligations: Divergence and Unity. USA: Bloomsbury Publishing. Wilson, R.M.S. (2014). The Routledge Companion to Accounting Education. USA: Routledge.