ACCT 322-RNB Group B Case Assignment 2 Amandeep Kaur Plaha (N01343348) Amar Kisseur (N1053097) Abdul Moiz (N01342650) Thao P

ACCT 322-RNB Group B Case Assignment 2

Amandeep Kaur Plaha (N01343348)

Amar Kisseur (N1053097)

Abdul Moiz (N01342650)

Thao P. Nguyen (N01160717)

Passang Tsering (N01233035)

Yasir Ali Raja (N01335997)

Instructor: Stanley A. Faria

Date: Nov 05, 2020

Question1

1. Suits for civil damages under common law usually result when someone suffers a financial loss after relying on the financial statement later found to be materially misleading. Duty of care was owed by the auditor which was breached, the auditors were aware in advance that Marathon Bank will be relying on their audited statements to make their additional lending decision and a loss was suffered as a result of the auditors negligence. Teitel & Deiana knew the fact that Marathon Bank will be one of the potential users of their audited statements. The negligence is further proven by the fact that material adjustments which were required to the financial statements were not caught by the auditors. Audit failure happened as auditors fail to conduct the audit in accordance with the GAAS so that misleading financial statement got published. Plaintiff can also be successful in proving that they actually suffer a loss and that the audit’s unqualified opinion was the direct cause of the loss. Given the above general guidance Marathon Bank should be able to bring forth a successful claim against Teitel & Deiana the auditors. The claim can be brought forward as it satisfies all of the components of the legal liability model discussed above. However, the audit firm may be held liable for the damages up to the additional loan of $450,000 and not the previous lending bank already given to Prestige International.

The liability in this scenario is further supported by the Canadian Supreme court decision in the recent Livent case where it was established that in general duty of care was owed to audit client but duty of care in respect of other services such as those provided to solicit investment (which is true in this case) is limited by the specific purpose for which service is performed. (Fraiberg, 2017)

2. As a plaintiff burden of proof relied on People’s bank. In order for legal liability to exist potential claimant need to prove four major aspects i.e. a duty of care was owed by the auditor i.e. the claimant falls into known or foreseeable user group, duty of care was breached by the auditor, plaintiff suffered a real loss and there was a connection between auditor’s negligence and claimant’s loss.  Given the above facts there was no beneficiary relationship between the People Bank and the audit firm. Furthermore, no liability exists towards Peoples Bank for the auditors as the said entity was not a foreseeable user of the financial statements and hence duty of care was not owed to them by Teitel & Deiana. Furthermore, Prestige International went to several other banks with the same audited report for additional loan but none of those banks forward the lending. So, People’s bank damage or loss is more related to its own negligence as Teitel & Deiana not owed then the duty of care. Based on the above facts, People bank might not get any damages from the audit firm.

Question 2

1. Generally Accepted Accounting Standard and Code of Professional Ethics require auditors to be Independent. Which means that auditor must perform their duties independently and they must appear to be fair not only to the companies and executives but also to the outside persons who use it. Susan was not independent as her client is a major shareholder of a mutual fund that she owns shares too. This investment of Susan questions her independency as there is a possibility of Self-interest threat. The principle requires that auditors must regularly assessing their responsibilities and relationships to ensure they're holding themselves to the highest standards of objectivity and independence Even through the investment of Susan in mutual fund is immaterial but it still questions her independency.

2. There was no violation in the given scenario based on the fact that that Yang was engaged as a practitioner and prepared the financial statements based on the information provided by the management. Further, a notice to reader which translates into no assurance on the level of assurance map was also added to the statements. Further, lack of notes also is not a violation as in a compilation assignment users may not need all financial statements which contain all disclosures normally required. (CPA, 2018)

3. Rule 217 states that a member shall not attempt to obtain client by advertising or other forms of solicitation that are false or misleading. While the Rule 215 still prohibits contingent fees on non-attest engagements including uncontested tax matters. These rules restrict auditors to link their fee on the outcome of services they provide. Jacob agree to charge fee based on the percentage of recoveries but the fee should be determined in accordance with the work he performed regardless the outcome hence violation of professional rules. Since the rules say auditors are not independent if they have received a contingent fee, it is also the violation of independent standard. On the other side, this apparent no out of pocket expense might attract clients which will be fraudulent and hence the volition of rules of conduct as well as ethical principles of auditing.
4. The Rules of Conduct and Ethical principles require auditors to be actively involved not only in performing his professional duties but also giving his opinions openly and actively in a professional manner. Code of professional ethics requires auditor to have professional competence. By not actively involved in his professional duties, Mathew has violated the rules of conduct and ethical principles by being a passive member in the meetings.

References

CPA Canada. (2018). Understanding Reports on Financial Statements.

Fraiberg, J. (2017). Livent decision and the scope of auditor liability. Retrieved 3 November 2020, from https://www.osler.com/en/resources/governance/2017/livent-decision-and-the-scope-of-auditor-liability