QUESTION 2

Larry Lambda, the owner of a small engineering company, approached Gloria Jean, a partner in a small audit firm, to conduct an audit of the company's records. Larry told Gloria that the audit was to be completed in time to submit an audited financial report to a Fat Bank as a part of a loan application. Gloria accepted the engagement immediately and agreed to provide an auditor's report.

Gloria hired four accounting students to conduct the audit and spent several hours telling them exactly what to do. Gloria advised the students not to spend time reviewing the controls or the business environment, but instead to concentrate on providing the mathematical accuracy of the ledger accounts and summarising the data in the accounting records that supported Larry's financial report. The students followed Gloria's instructions and after four weeks gave Gloria the financial report, which did not include footnotes. Gloria reviewed the financial reports and prepared a unmodified (clean) auditor's report indicating that in her opinion the financial report gave a true and fair view. The working papers, however, did not refer to the use of acceptable accounting polices, or compliance with relevant regulations and statutory requirements.

Required:

Discuss whether Gloria has exercised reasonable skill and care in conducting the audit, justify your answer with relevant cases.