assigment

1. AUD 610 - ASSIGNMENT 2
LEGAL LIABILITY
QUESTION 1 – December 2016
Zool Fahmy & Associates, a chartered accountant firm is the auditor of Harmoni Sdn Bhd. Harmoni Sdn
Bhd applied for a RM250,000 term loan facility from ABC Bank. The audited financial statement for the
year ended 30 June 2016 was used to secure the loan. During the audit, a junior team member
discovered a major internal control weakness pertaining to the procedures for the issuance of company’s
cheque. The finding was highlighted to the audit team leader and documented in the audit working
papers. It was not discussed with the management and included under non-reporting points.
ABC Bank approved the loan application and full disbursement was duly made in accordance with the
terms of the agreement. Prompt payment was made by Harmoni Sdn Bhd during the first year.
However, due to the company’s financial difficulties, Harmoni Sdn Bhd fails to fulfill an obligation in the
subsequent payments. ABC Bank, initiated the winding up process after the company failure in servicing
its loan. At the same time a major misappropriation by the company’s finance manager has been
detected involving large amount of bank balance and short term investments. This was not discovered
for a long time since the auditor only relied on the letter of representation given by the client and did not
sought independent audit evidence from the bank.
Required:
i. Explain whether the auditor has exercised due care in the audit of Harmoni Sdn Bhd.
ii. Discuss the possible liability of the auditor if a lawsuit is initiated by ABC Bank against Zool
Fahmy & Associates. Quote relevant legal cases to support your answer.
QUESTION 2 – June 2016
QUESTION 3 – December 2015
Auditors are challenged with increasing litigation cases. These cases revealed marked difference in the
judgement that the extent of auditor’s liability is unclear. Hence, it is vital that auditors exercise
reasonable care and skills.
Required:
i. Explain auditor’s duties as stipulated by the Companies Act 1965.
ii. Discuss four (4) factors to reduce lawsuits against auditors
iii. Explain the three (3) conditions that should be met in order to establish the duty of care
QUESTION 4 – June 2015
Azah is the senior auditor for Ali & Partners and she has been the auditor in-charge for Pembinaan
Sekutu Sdn Bhd (PSSB) for the past three (3) years. She is now assigned to audit PSSB again for the
financial year ended 31 October 2014. During the current audit, Azah found that the company is facing
going concern problem. Due to the going concern problem, PSSB shareholders’ fund is negative and the
company is not able to meet its loan obligations. The Chief Executive Officer is able to convince Azah
that the bank is willing to reschedule the loan and the going concern problem will be solved.

2. Thus, Azah issued a standard unqualified report. However, several months after the issuance of the
financial statement, the auditors were sued by the investors, who relied on the financial statements, on
the ground of negligence.
Required:
i. Differentiate between gross negligence and contributory negligence.
ii. Explain whether the audit firm was negligent to the client.
iii. Explain whether a duty of care existed between the auditor and the shareholders.
QUESTION 5 – December 2014
Zaki is the manager with Zureeda and Partners and has been the auditor for Sepantas Transport Sdn Bhd
(STSB) for the last ten years. During the financial year ended 31 December 2013, STSB has secured hire
purchase loan to acquire 20 passenger buses from HBB Bank Bhd. On 28 April 2014, the license to
operate the inter-state bus service was revoked by Land Public Transport Commission (SPAD). Zaki
confronted the management of STSB on the revocation of license by SPAD but they argued that they are
in the process of negotiating the license with the authority. Despite the issue of revocation of license by
SPAD, Zaki issued an unqualified audit report, since there is no official letter issued by SPAD to STSB.
Required:
i. Differentiate the auditor’s liability under Common Law and Statutory Law.
ii. Based on the case above, discuss whether the auditors are liable to the bank.
QUESTION 6 – December 2013
Aina and Associates is the auditor for Bistro Sdn Bhd, a private company. Based on the audited account
of Bistro Sdn Bhd, Ramada Bhd acquired the entire share capital of Bistro Sdn Bhd. A year after
acquisition, Bistro Sdn Bhd went into liquidation. Ramada Bhd sue the auditor and accused that the
audited financial statements has negligently performed by blindly accepting high inventory valuation
placed by Bistro Sdn Bhd.
i. Discuss whether the auditor is liable to Ramada Bhd.
ii. Explain any FIVE (5) methods that may be used by an audit firm to minimize its audit failure.
QUESTION 7 – January 2013
Angkasa Wira Bhd was recently declared bankrupt as the company was unable to pay its mortgage loan
totalling RM5 million. It was discovered by the liquidators of the company that the assets had been
overstated by RM800,000 as a result of fictitious non-current assets being recorded in the financial
statements. The liquidators of Angkasa Wira Bhd are now suing the auditor, Rahana & Co, for breach of
contract and negligence.
The auditors have not carried out adequate procedures to verify the non-current assets and had relied
mainly on the management’s non-current assets schedule. However, the auditors claimed that they are
not liable for the loss because the loss was not caused by their negligence.
Required:
Discuss whether the auditors had been negligent in the audit of Angkasa Wira Bhd, leading to the
bankruptcy of the company.
THE END