Greg Thomas is a partner in a small public accounting firm of Thomas and Associates (T&A). Greg

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Question:

Greg Thomas is a partner in a small public accounting firm of Thomas and Associates (T&A). Greg set up T&A after working for 3 years as an auditor with a big accounting firm. Greg believes that he has the qualifications and experience to offer quality audit service.

TCZ Ltd is an Australian company listed on the stock exchange. TCZ is in the water supply business. Its core business is providing drinking water to residents. The Chief Executive Officer (CEO) is Jim Jones.

In early May 2020, Greg was approached by Jim to become TCZ's auditor. TCZ's reason to approach T&A was that they were dissatisfied with the service of the previous auditor. However, according to Greg's sister who was the Finance Manager of TCZ, the true reason was the disagreement between the previous auditor and the CEO on the accounting treatment of some account balances in last year's financial statements. A few days later, Greg accepted the appointment without informing TCZ that his sister was working for the company.

During the audit, Greg noted that TCZ has included in its financial statements developer contributions to the value of $156 million. Greg did not have a good understanding of developer contributions. However, he did not want TCZ to know of his lack of knowledge so he concluded that the account balance is fairly stated after vouching the balance to the adjusting journal entries.

In addition, Greg had difficulties in comprehending the future income tax benefits used by TCZ in calculating the fair value of the infrastructure assets. Greg did not enroll in the taxation subject as part of his undergraduate study because he had heard that the subject was a hard one and he was struggling with his studies.

In March 2021, Greg read in the newspaper that TCZ had filed for bankruptcy. A preliminary investigation by ASIC found that TCZ's balance sheet was materially misstated. In particular, ASIC was criticizing the truth and fairness of developer contributions and future income tax benefits accounts.

This week, lawsuits arrived at T&A from two law firms:

(a) From A&B Lawyers, claiming on behalf of the local residents. It is alleged that the negligence of the auditor has caused the bankruptcy of TCZ and inconvenience in their daily lives.

(b) From C&D Solicitors, on behalf of the local shop owners. The shop owners alleged that they suffered financial losses as the bankruptcy of TCZ had led to a decrease in customer numbers as many of the customers were TCZ employees.

Required:

(a) Identify and discuss three (3) principles in the APES110 Code of Ethics for Professional Accountants that are most relevant to this case.

(b) Considering each lawsuit SEPARATELY, state the likelihood of T&A's defense succeeding against each lawsuit. Discuss and support your answers with case law examples.