Yasmar Ahmed is an audit partner in the accounting firm of Big, Small and Inbetween (or BSI). She had previously found significant weaknesses in the payroll processing systems of one of her long-standing clients, Parramatta Consolidated Industries Limited (or PCIL). PCIL’s payroll manager had been informed about this deficiency in the past. As Yasmar prepared for this year’s audit she discovered that a number of her staff had just resigned. Apparently a group of them decided to leave at short notice and start their own auditing firm. Consequently, she decided to take on some contract audit staff on a temporary basis through an employment agency in order to get the work done in a timely fashion. The agency said that the staff were qualified and experienced in auditing so would need little supervision. Yasmar thought this sounded great so sent the staff out to the client to collect evidence by following the audit plan that she had used for PCIL last year. At the end of the audit the staff confirmed that they found nothing to be concerned about so Yasmar signed the audit report on the financial statements. Later, Yasmar found out that PCIL’s payroll officer had been arrested for a $1,000,000 fraud against the company that had taken place during the year that she had just audited. It appears that the payroll manager did not improve the systems or advise the directors of the deficient systems that allowed the fraud to occur. A group of PCIL’s shareholders want to sue BSI for the money lost by the company as it has brought down their share values.

Required

Advise Yasmar’s partners at BSI as to their potential liability. Refer to any relevant auditing or ethical standards or case law to support your answer and what must be established that an auditor has been negligent.

Answer rating: 100% (QA)

If it could be demonstrated that the partners of BSI were careless in their audit of PCIL then those ... View the full answer