Audit - Assurance and Compliance Client and Third Party

Question: Discuss abot theAudit, Assurance and Compliancefor Client and Third Party. Answer: Introduction The main aim of this assignment is develop deep insight about liability of auditor both towards client and the third party associated with it. Along with this, it also describes about auditors independence whether actual or perceived. Independence of auditor is fundamental to the conduct of quality and effective conduct. Moreover, the assignment also includes description about some cases related to auditors independence. Liability of Auditor towards Client and Third Party Auditors are primarily responsible for the preparation and presentation of financial statement and they are required to perform 100% check over all the items recorded on the account. Along with this, the main role of auditor is to develop qualified audit system containing effective control that protects company against all frauds and mistakes. It is also required by auditor to review financial statement of company in a systematic and appropriate manner informing the company about actual position of its financial statement. Moreover, it is the duty of auditor to inform companys management of any irregularities enclosed with financial report of the company (Plessis, et al., 2010). It is also the responsibility of auditor not to show negligence at the time of working for client and the third party linked to the client. Auditors are also liable to perform their duty with diligence and expertise. Furthermore, negligence is defined as wrongful or careless behaviour that cause breach of duty of care and contractual duty. In case of negligence, auditors can be held liable for the loss or damages suffered by third part associated with the client. As auditors owns a duty of care towards third party for damages or loss incurred as a result of negligent misstatement of the financial reports (Latimer, 2012). In the given case, audit firm King and Queen negligently conduct audit of Impulse Pity Ltd. The auditor gives error free report in 2012 without adequately reviewing the financial statement of the company. As a result of this negligent act, third part EFL provides loan to Impulse Pity Ltd by relying on the report provided by King and Queen (auditor). Therefore, in this case King and Queen are liable to reimburse loss suffered by EFL. As the auditor owned duty of care and he breached that duty and due to that breach loss or damages are suffered by the third party. Similar decision was given by court in case of Columbia Coffee Tea Pty Ltd v Churchill, in this case the Supreme Court of New South Wales held auditor liable towards third party in the condition where there is assumption of responsibility. The facts given in this case explain that an investor brought a case against auditor for the losses suffered by him due to relying on misstated financial report (Barker, 2015). In the given report the debts of the company are understated. Therefore, the court held auditor liable to reimburse losses incurred by investor and the auditor is not only liable towards audited company but also towards third party associated. According to laws of Australia and Auditing standards, the auditor is only liable towards the client and to the third parties associated with the client that takes decision on the basis of reported presented by the client. The auditor will be held liable if any damages of loss incurred to the third party because it is the responsibility of auditor to accurately review the companys records and as a result of auditors negligent act losses incurred to the third party. Moreover, an auditor is not held liable to reimburse the losses or any damage to the third party if there is absence of contractual binding relation between the third party and the client. Furthermore, if special relationship exists between the third party and the auditor then in case the auditor can legally protect its position from being liable to third party. In case of special relationship, if third party linked to the client takes auditors advice regarding overall performance of the company and even after taking advice, the third did not consider it in taking decision regarding the client (McLaughlin, 2015). Then in such a case the third party has no right to take legal action auditor for getting reimbursement of damages or losses. In the given case, if EFL had written to King Queen looking for advice that they intended to give loan to Impulse and were relying on the 2012 audited financial report to assist them in making their decision, then in such condition the auditor will be held liable. But, if the auditor inform the EFL about the real financial condition of the company and after that EFL take decision to grant loan to Impulse on the basis of presented financial report. Then in such condition EFL has no right to file case against the auditor for getting reimbursement of losses. Caparo Industries plc v Dickman, In this case the liability of auditor is limited to reimburse economic loss suffered by third, if that party takes decision by relying on the presented audited report. The facts given in the case explains that Caparo(investor) takes investing decision on the basis of facts presented in the companys financial statement (Monaghan, 2015). But the auditor was neither aware about the existence of Caparo nor the purpose for which the financial statements were used by the company. Then in such case, no duty of care was owned by auditor and therefore was not liable to reimburses third party for damages. Auditors Independence Independence can be defined as the foremost mean by which an auditor demonstrates that he/she can perform the respective work in an objective manner. The primary objective of an audit is to provide expert or independent opinion to the shareholders and to ensure that whether the companys annual account represents fair and true view of companys financial position. Along with this, it helps to identify that whether facts presented in financial statement are sufficient to be relied in order to take accurate investment decisions. Therefore, independent auditor can be defined as certified public accountant involved in examining the financial records and business transactions of a company (Richardson, 2012). The concept of independence of auditor is fundamental to the conduct of quality and effective audit. Along with this, high degree of auditors independence helps to enhance credibility of financial statement and independent audit report will be accepted and respected by all the companys stakeholders. The primary responsibility of an independent auditor is to provide clear picture of companys financial position to all its stakeholders. Therefore, the independent audited report present by auditor is important for all stakeholders in the organization (Needles, et al., 2013). It is important for companys management to identify the reasons of losses so that they can take effective measures to control it. Along with this, it is also important for lenders, investor and creditors to identify the true credibility and profitability position of the company. So they can effective make decision regarding granting loan and making investment in the company. Furthermore, perceived independence is also known as independence in appearance and it is achieved when auditor avoids specifics details and circumstances that are significant and reasonable to be informed to the third party that has understanding of all the significant details (Collings, 2011). Moreover, it is required to have independent v iew of auditor whether actual or perceived in order to increase trustworthiness of the audited report. As per section 140 of APES 110, it is the duty of an auditor to maintain the confidentiality of information of its clients, while conducting audit process. The standard states that there exist professional and business relationships between the auditor and client, which require that the auditor should not reveal any such information to third parties without taking approval of the client. Also, the auditor is also not allowed to use its clients information for seeking any personal benefit (Cameron O'Leary, 2015). However, Australian Accounting Standards permit the auditor to disclose his clients information if it is required by any relevant professional body or statutory body. It is the duty of an auditor to adhere to the applicable rules and regulations along with accounting standards in order to avoid unnecessary legal actions against him. In the presented case, Bob use the certain information of his client, Club Casino to use it in his university assignments. Since, Bob has used the information without taking permission of the client he has breached the duty of confidentiality. In order to properly discharge his duties, Bob must take prior approval of Club Casino to use its information for his personal advantage. According to the accounting standards of Australia, an auditor can be defined as independent identity that provides company with an accountants opinion but who is not an employee of that company or not otherwise associated with the company. It means that an auditor should not be a partner or any other manager or officer of the company for which he/she is doing auditing (Stewart Munro, 2010). In the given case, Wendy has been working as an engagement partner for a number of years. Due to the retirement of company secretary he becomes secretary of the company for that period of time. But in this case, Wendy has no legal authority to perform the audit function of that company as he is already in existing relation with company as an engagement partner. Along with this, as an person associated with the company he may not be able to give unbiased results.It is already stated that an independent auditor is a person who is not associated with company in any way. This means that he may neither be an employee or manger or any person having relation with the auditing client. In the present case, Leo is in relation with foreman of the factory in which he is required to perform the audit. Therefore, he is not able to conduct audit independently in Precision Machinery Limited. Along with this, Leo may not be able to provide valuable and accurate audit report as his opinions and views may be affected by his relationship with client for which audit is required to done (Beekes, et al., 2015). This in turn leads to ineffective and unfair presentation of financial position of company as the report may contain biased results. As per Australian accounting standards, a person holding any shares or security of the company is not allowed to carry out audit of that company. As he/ she is in some way associated with that company. In the present case, Chan Associates are auditors of Classic Reproductions Pty. Limited and in place of outstanding fees company gave him furniture for 50% of value of outstanding fees and 25% shareholding in an unrelated listed company. Therefore, in this case Chain and Associates is entitle to conduct audit in a legal way as he is holding shares in other company and not in the company in which he is performing the auditing functions. Conclusion On the basis of above explanations, it can be concluded that auditor has significant liability towards the client and third party associated with it. Therefore, third party is legally entitled to recover losses or damages as the auditor hold duty of care towards the third party. Moreover, it is also assessed that there is difference between actual and perceived independence of auditor. Therefore, the auditor must conduct audit with actual independence for effective and credible presentation of companys financial position. References Barker, K. (2015). Negligent Misstatement in Australia-Resolving the Uncertain Legacy of Esanda. Ch, 13, 319-344. Beekes, W., Brown, P. and Zhang, Q., (2015). 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