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Fundamentals of Auditing

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Fundamentals of Auditing ­ACC 311
VU
Lesson 08
LIABILITIES OF AN AUDITOR
Auditors' Liabilities
 Civil Liabilities (arising from law suits/Liability for negligence)
 Under law of contract (initiated by the audit client)
 Under law of tort (initiated by other users of FS)
 Criminal Liabilities
­  Under sections 157, 255, & 257
­  Against charges of forgery (evidence created / documents forged etc.)
­  Against false statement (regarding opinion in report)
Civil Liabilities
Civil liabilities arise in the situation when there is absence of reasonable care and skill that can be expected
of a person in a set of circumstances.
When negligence of an auditor is being evaluated, it is in terms of what other competent auditors would
have done in the same situation
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Fundamentals of Auditing ­ACC 311
VU
Jeb Fasteners v Marks Bloom (1980)
The plaintiff acquired the share capital of the company. The audited accounts, due to the negligence of the
auditors, did not show a true and fair view of the state of affairs of the company. It was accepted that at the
time of the audit the defendant auditors did know of the plaintiffs but did not know that they were
contemplating a take over bid.
HELD: whilst recognizing that the auditors owed a duty of care in this situation. It was decided that the
auditors were not liable because the plaintiff had not suffered any loss. It was proved that the plaintiffs
would have bought the share capital of the company at the agreed price whatever the accounts had said.
Therefore, whether or not a duty of care existed was not directly relevant to the decision.
How to minimize the liabilities
 Not being negligent
 Following the ISAs
 Agreeing the engagement letter
 Defining in report the work undertaken
 Defining the purpose for the report
 By limiting liabilities to third parties
 By defining the scope of professional competence
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Table of Contents:
  1. AN INTRODUCTION
  2. AUDITORSí REPORT
  3. Advantages and Disadvantages of Auditing
  4. OBJECTIVE AND GENERAL PRINCIPLES GOVERNING AN AUDIT OF FINANCIAL STATEMENTS
  5. What is Reasonable Assurance
  6. LEGAL CONSIDERATION REGARDING AUDITING
  7. Appointment, Duties, Rights and Liabilities of Auditor
  8. LIABILITIES OF AN AUDITOR
  9. BOOKS OF ACCOUNT & FINANCIAL STATEMENTS
  10. Contents of Balance Sheet
  11. ENTITY AND ITS ENVIRONMENT AND ASSESSING THE RISKS OF MATERIAL MISSTATEMENT
  12. Business Operations
  13. Risk Assessment Procedures & Sources of Information
  14. Measurement and Review of the Entityís Financial Performance
  15. Definition & Components of Internal Control
  16. Auditing ASSIGNMENT
  17. Benefits of Internal Control to the entity
  18. Flow Charts and Internal Control Questionnaires
  19. Construction of an ICQ
  20. Audit evidence through Audit Procedures
  21. SUBSTANTIVE PROCEDURES
  22. Concept of Audit Evidence
  23. SUFFICIENT APPROPRIATE AUDIT EVIDENCE AND TESTING THE SALES SYSTEM
  24. Control Procedures over Sales and Debtors
  25. Control Procedures over Purchases and Payables
  26. TESTING THE PURCHASES SYSTEM
  27. TESTING THE PAYROLL SYSTEM
  28. TESTING THE CASH SYSTEM
  29. Controls over Banking of Receipts
  30. Control Procedures over Inventory
  31. TESTING THE NON-CURRENT ASSETS
  32. VERIFICATION APPROACH OF AUDIT
  33. VERIFICATION OF ASSETS
  34. LETTER OF REPRESENTATION VERIFICATION OF LIABILITIES
  35. VERIFICATION OF EQUITY
  36. VERIFICATION OF BANK BALANCES
  37. VERIFICATION OF STOCK-IN-TRADE AND STORE & SPARES
  38. AUDIT SAMPLING
  39. STATISTICAL SAMPLING
  40. CONSIDERING THE WORK OF INTERNAL AUDITING
  41. AUDIT PLANNING
  42. PLANNING AN AUDIT OF FINANCIAL STATEMENTS
  43. Audits of Small Entities
  44. AUDITORíS REPORT ON A COMPLETE SET OF GENERAL PURPOSE FINANCIALSTATEMENTS
  45. MODIFIED AUDITORíS REPORT