As the auditor for Locker-parts Hardware Ltd, you are happy with the smoothness of the audit for the year ended 30June 2010. Today, your audit partner tells you that Locker-parts has just gone into liquidation. The financial controller was diverting company fluids into a Swiss bank account and has left the country to live in Majorca. The lawyers for the creditors of Locker-parts are taking action against the partner for not performing an appropriate audit They behest that a properly conducted audit should have detected such a fraud.

The fraud was substantial however, it was not material from the company's point of view. You explain to the partner that the audit was performed in accordance with all auditing standards and nothing was found to arouse suspicion during the audit- The audit took the same amount of time as last year's, and all appropriate work steps mere performed. Your stork was reviewed by a manager and the entire file was reviewed by the audit partner.

The audit partner is still concerned. He rings an audit partner in an associated office of your accounting firm and asks her to review the audit file. She agrees and spends a day reviewing the file. After completing her review, she is satisfied that the audit was performed properly.

Required:

a. Explain whether your accounting firm has acted with due care. What do you think will be the court's decision if the case goes to trial?

b. Even if the partner is convinced, he acted with due care, explain why he may offer Locker-parts a substantial settlement amount.

c. Explain why is independence so essential for auditors? Explain the difference between independence in appearance and independence in fact.

Answer rating: 100% (QA)

Answee giuen below Part A Yes Accouning fiem has acted with due caee is beec ouse as pep satement s ... View the full answer