Audit Case Study

Individual Assignment 1
Submitted by Jeewan Koirala
Answer 1
Audit firms adopt the approaches for auditing the specified audit assignment which will be the key factor to determine the outcome of that audit. Risk based audit approach is related towards the company’s financial statements that may contain misstatements which can happen by omission or error as risk consequences faced by business. If auditors failed to go for correct approach there is more likeliness of failing of audit and this failure will lead to legal case against the audit firm and also will damage the reputation of the firm. Risk based audit approach is implemented by effectively and in systematic way by focusing in nature,timimg and auditing to the most potential areas that
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Going concern principle is mainly used to prepare a financial report. As an auditor he/she should be responsible to go through all things to make an decision and come to conclusion.Follwing things should be taken by an auditor
I:Proper accounting standards have been used while applying financial information
II: Relevant laws have been complied
III:Auditors knowledge of entity should reflect on financial statement.
IV:All relevant materials should be disclosed for the true representation of financial information. Duty of care is compulsory and should be established between Auditor and third party for an auditor to held them responsible for the tort of negligence towards third party than to primary client.Caparo industries v dickman (1990) 2 AC 605 which is also known as “caparo test” has done recognition of duty of care between third party and auditor when : I:loss of plaintiff was reasonably foreseeable because of defendants conduct
II:Sufficient proximate relationship between parties
III:it is Fair,just and reasonable to impose duty of care by court
Similar case for this will be Esanda finance v peat Marwick hungerfords(1997) 188 CLR 241.This case ruling
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There are dfferent approaches by courts when they decide on which auditors owes a duty of care to the third party for which they don’t have any contractual relationship.The responsibility assumption test from Heldy byrne and co ltd v Heller and partners ltd(1964) AC 465 and threefold test which is ruled in Caparo has given guidance for this case.
An auditor is only held responsible to owe third party duty of care if it can prove that they knew about the facts while auditing the financial statements, Audiotrs clients have communicated about the facts about a particular transaction and after whether that auditor has acted responsibly to other than his client is to be decided objectively by reference to all the circumstances of the case.
In conclusion in this given case of King & Queen and EFL as any Proximity cannot be established and it was also not foreseeable that EFL would use unprofessional financial report without consulting their interest with the audit firm.So King & queen is not liable to

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