Susan Harris is a new assistant auditor with the public accounting firm of Spark
ID: 2585730 • Letter: S
Question
Susan Harris is a new assistant auditor with the public accounting firm of Sparks, Watts, and Wilcox, CPA's. On her third audit assignment, Harris examined the documentation underlying 60 disbursements as a test of controls over purchasing, receiving, vouchers payable, and cash disbursement procedures. In the process, she found five disbursements for the purchase of materials with no receiving reports in the documentation. She noted the exceptions in her working papers and called them to the attention of the senior auditor. Relying on prior experience with the client, the senior auditor disregarded Harris's comments, and nothing further was done about the exceptions.
Subsequently, it was learned that one of the client's purchasing agents and a member of its accounting department were engaged in a fraudulent scheme whereby they diverted the receipt of materials to a public warehouse while sending the invoices to the client. When the client discovered the fraud, the conspirators had obtained approximately $700,000 - $500,000 of which was obtained after the completion of the audit.
Required
Discuss the legal implications and liabilities to Sparks, Watts, and Wilcox as a result of the above facts. (AICPA, adapted)
Explanation / Answer
In the given case it is observed that senior partners not given proper attention to exceptions which has been identified and highlighted by the junior partners. Later it was discovered that exceptions was a planned fraud done by the employees of the auditee company. In this mal practice it is observed that culprits have done this fraud post audit also for amounting to $500,000.
This implies negligence in the part of auditor while discharging his duties. This will treat as civil offence on the part of the auditor and they may face legal consequences under the Contracts Act and under the law of Tort. Under these laws liability of auditor to clients and third parties has established.
Under Contract Act parties can seek remedy for a breach of contractual obligation. Deviation of the service from engagement letter warrant financial liability of the auditors.
Under laws of Tort Auditors can be sued for negligence in discharge of duties to third parties who suffers because of negligence of auditors.
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