Several years ago, Tim O’Callaghan decided to build an Irish pub in Leicester. This pub was to cater for the 25 to 40-year-old market. Tim’s first pub, Blooms, was very popular because the range of drinks and the quality of the service were excellent. The pub was attractive, yet modest, and the prices were reasonable.

The success of the first Blooms pub encouraged Tim to expand. Over the next three years, he opened more pubs in Leicester and the East Midlands, and there are now 12 Blooms pubs. All of the pubs have been successful because Tim has managed to maintain the same high standards that were achieved for the original pub.

With the rapid expansion of his business, Tim hired a financial controller and supporting staff. The financial operations of the business are now managed by the financial controller and his staff. Tim applied to the bank for additional financing to open another pub this year. For the first time ever, the bank asked him to provide financial statements audited by an accountant. The bank assured Tim that the financial statements were required not because it doubted his integrity or thought him to be a poor credit risk. The loan officer explained that bank policy required all businesses over a certain size to supply audited financial statements with loan applications, and Tim’s business had reached that size.

Tim was not surprised by the bank’s requirements. He had ruled out an audit previously because he had great respect for the financial controller’s ability, and he wanted to avoid the fee. However, the growth of his business made the audit a sound business requirement.

He also believed that an audit would help to detect any fraud that might be occurring in his pubs.

Tim hired Waterman and Partners to perform the audit.

Required

(a) Discuss the responsibilities that Waterman and Partners have to Tim O’Callaghan (the major shareholder) as external auditors of Blooms Ltd.

(b) What effect, if any, would the detection of fraud during the audit of Blooms have on the expression of an opinion on the financial statements? Give reasons for your answer.