Ruijing Zheng - 43243411

Thanh Thao Nguyen - 43078510

ACCT 7103 AUDITING TOPIC 2 - GROUP PRESENTATION

Question 2 Surfing Life Ltd is a nationa retai !hain s"e!ia i#ing in $ea!h and eisure ! othing% &t 'as su!!essfu y ta(en o)er $y *right Si )er Ltd on 15 +e!e,$er 2012% T'o ,onths after the ta(eo)er- Surfing Life found out that the in)entory 'as signifi!ant y o)erstated on the audited finan!ia state,ent de i)ered $y .ree and Stone- a !o,"any 'hi!h has ser)ed *right Si )er for 5 years% &n /"ri 2013- *right Si )er de!ided to sue .ree and Stone and in a !ourt a!tion- the fo o'ing ,atters 'ere esta$ ished in e)iden!e0
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The engage,ent tea, did not attend a the "hysi!a sto!(ta(es in 2012e1!e"t Sydney and 2e $ourne 'arehouses 'hi!h !onstituted a$out 503 of the stated in)entory $a an!es%

.ai ed to find out signifi!ant "ortion of in)entory at *ris$ane 'arehouse did not e1ist% .ai ed to )erify the defi!ien!y of in)entory% The auditors did "erfor, the audit under ti,e and $udget "ressure fro, Surfing Life Ltd% They had he d this audit for the "ast 5 years and there 'as no e)iden!e of any "re)ious ,isstate,ents or adjust,ents% &t !an !o,e to a !on! usion that the "ast "erfor,an!es 'ere good enough that they !an re y on the "rior o"inions%

The auditor tea, a so raised in e)iden!e that0

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There is no e)iden!e that the auditors (ne' the audited finan!ia state,ents 'ou d $e "ro)ided to *right Si )er as "art of the ta(eo)er due di igen!e !ondu!ted $y *right Si )er%

This !ase re ated to ia$i ity to a third "arty as the auditors do not ha)e a !ontra!tua re ationshi" 'ith *right Si )er 4 the ta(eo)er !o,"any% To ,a(e it ! earer- the fina audited finan!ia state,ent of Surfing Life Ltd 'as !ondu!ted $y .ree and Stone on 30 5une 2012- the !ontra!tua re ationshi" $et'een *right Si )er and .ree and Stone didn6t e1ist unti the ta(eo)er 'as
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!o," eted si1 ,onths ater- 'hi!h ,eans- 'hen *right Si )er use the audited finan!ia state,ent to assess their ta(eo)er de!ision- *right Si )er just a "otentia ! ient to .ree and Stone% Thus- the ia$i ity of .ree and Stone- auditor of Surfing Life Ltd- is to a third "arty% There are three defenses !an $e e," oyed in this !ase0

Contributory neg igen!e o" ! ient#$ %ire!tor$

&'(0 /S/ 501- "aragra"h 110 The auditor sha o$tain suffi!ient a""ro"riate audit e)iden!e regarding the e1isten!e and !ondition of in)entory $y attendan!e at "hysi!a !ounting un ess i,"ra!ti!a$ e% /S/ 501- "aragra"h 210 ;hen in)entory is situated in se)era o!ations- under "aragra"h 5 of this /uditing Standard- the auditor needs to !onsider at 'hi!h o!ation attendan!e is a""ro"riate- ta(ing into a!!ount the ,ateria ity of the in)entory and the ris( of ,ateria ,isstate,ent at different o!ations% C'$e0 /;/ Ltd )% +anie s- the ! ient fai ed to ,eet the standard of !are re<uired for its o'n "rote!tion and 'as thus "ro"ortionate y ia$ e a ong 'ith the auditors% A)) i!'tion0 The audit tea, 'as under signifi!ant "ressure and sti"u ated $udget% &t is i,"ra!ti!a for the, to )isit a the sites% The ! ient fai ed to "ro)ide suffi!ient !are to the auditors- 'hi!h- as a resu t- i,"airs the auditor=s o$je!ti)ity and i,"artia judg,ent% .ree and Stone has ser)ed Surfing Life for fi)e years% *ased on their "ast e1"erien!e- they !hose the o!ations 'hi!h they thin( are a""ro"riate to )isit% That=s 'hat a reasona$ e "erson 'ou d do in su!h !ir!u,stan!e%

No %uty o" !'re o(e% to *rig+t Si ,er

C'$e0 5>* .asteners Ltd ) 2ar(s * oo, ? 7o% T'o tests need to esta$ ish a duty of !are% .irst y- it 'as ne!essary for the " aintiff to ha)e re ied on the audited a!!ounts% Se!ond y- the " aintiff=s "ur"ose in so re ying shou d $e reasona$ y foreseea$ e $y the auditors% A)) i!'tion0 *right Si )er is $etter a$ e to assess the i(e y e1tent of their osses and !an a!t to "rote!t the,se )es against osses- rather than re ying on the audit re"ort% .or e1a," e- it !an see( inde"endent in)estigation and )erifi!ation of the finan!ia infor,ation re e)ant to its de!isions% Thus- there 'as no duty of !are that the auditors o'ed to *right Si )er%

Ruijing Zheng - 43243411

Thanh Thao Nguyen - 43078510

C'$e0 7a"aro &ndustries " ! ) +i!(,an% /uditors o'e a duty of !are to e1isting shareho ders !o e!ti)e y- $ut not to "otentia shareho ders un ess the auditor intended to indu!e the "arty to a!t in re ian!e on the auditor=s re"ort% A)) i!'tion- /!!ording to the @ouse of Lords in 7a"aro- a satutory audit re"ort is ,eant on y to "ro)ide infor,ation to the !o,"any and its shareho ders to e1er!ise !o e!ti)e "o'ers of !or"orate go)ernan!e% &t is not intended as ad)i!e to "otentia in)estors or those !onte," ating a ta(eo)er $id% The ta(eo)er 'as !o," eted on 15 +e!e,$er 2012% The audited finan!ia state,ents that *right si )er re ied on 'as de i)ered on 30 5une 2012% /t that ti,e*right si )er is just an e1terna "art of the engage,ent $et'een Surfing Life and .ree and Stone%

Pri,ity o" !ontr'!t

&'(0 /AS 1014- "aragra"h 110 &n )ie' of the !ir!u,stan!es asso!iated 'ith a re<uest for a "ri)ity etter and the audit !on!erns noted- un ess an auditor intends to a!!e"t res"onsi$i ity to a third "arty- an auditor res"onds une<ui)o!a y to a re<uest for a "ri)ity etter stating that the $ody of shareho ders in the on y grou" entit ed to re y on the audit re"ort% /dditiona reasons are gi)en to state 'hy it is unreasona$ e for the third "arty to re y on the audit re"ort as a""ro"riate% .ai ure to de! ine res"onsi$i ity to a third "arty "resents a ris( of res"onsi$i ity $eing esta$ ish if si en!e is ta(en as agree,ent% / !o"y of the res"onse is sent to the auditee to ensure that the auditor- third "arty and auditee ha)e a !o,,on understanding of the !onte1t in 'hi!h the auditor=s re"ort on the finan!ia state,ents is issued% A)) i!'tion- Bnder !ontra!t- on y the dire!tors or- ,ore !o,,on y- the i<uidator of re!ei)er- ,ay sue the auditor in res"e!t of osses in!urred $y the !o,"any arising fro, the auditor=s neg igen!e% /t the ti,e 'hen the audited finan!ia state,ent 'as de i)ered- the !ontra!tua re ationshi" 'as $et'een Surfing Life and .ree and Stone% *right Si )er is just a third "arty to .ree and Stone% *right Si )er did not re<uire any "ri)ity etters nor gi)e the a!(no' edge,ent to ad,it the "otentia inade<ua!y of the audit re"ort for the "ur"oses of third "arty% /s a resu t- the auditors did not "ro)ide a "ri)ity etter to the *right Si )er as they did not (no' that audited finan!ia state,ents

/77T71038T9:&7 2

:age 3

'ou d $e "ro)ided to *right Si )er as "art of the ta(eo)er due di igen!e !ondu!ted $y *right Si )er% :ro1i,ity !annot $e esta$ ished un ess there is a "ri)ity etters%

References: /rens- *est- Shai er- .ie d er- > der- *east y- 2013 C/uditing- /ssuran!e Ser)i!es and >thi!s in /ustra ia0 /n integrated a""roa!h=- D th edition- :earson /ustra ia- .ren!h .orest- NS;% The &nstitute of 7hartered /!!ountants in /ustra ia- C/uditing- /ssuran!e and >thi!s @and$oo(=- 2013