Question

Ahmad & Partners is a public accounting firm in eastern Canada. Last year it audited Chan Corporation, a publicly traded company that manufactures automobile component parts. Although the company has been profitable for many years, Ahmad & Partners was hired by Canada Bank, which was considering extending a large loan to Chan. The bank wanted the audit because Chan’s expansion plans would change the company’s financial structure significantly from the previous year. Ahmad & Partners conducted the audit and gave an unmodified opinion. Xing Investments Inc. purchased $750,000 of the common stock of Chan, intending to hold the stock as a long-term investment. Unfortunately, Chan went bankrupt shortly after the share purchase and Xing Investments lost all of its investment. Canada Bank was unable to recover any of its loan to the company. Xing Investments and Canada Bank subsequently sued Ahmad & Partners to recover their losses. Which of the following are possible defences for Ahmad & Partners? (Several choices may be correct.)

A) There was no breach of the duty of care as the audit was done in accordance with professional standards.

B) Ahmad & Partners did not owe Xing Investments a duty of care as it was not a known user.

C) The loss was caused by an economic downturn and not as a result of the issued opinion.

D) The investors did not rely on the financial statements to make their investment decision.

E) The work performed was done to the level of the reasonable auditor.

Answer 1

Ahmed & Partners conducted the Audit of  Chan Corporation, a publicly traded company and gave an Unmodified Opinion.

Xing Investments and Canada Bank subsequently sued Ahmad & Partners to recover their losses occured due to Bankruptcy of the Chan Corporations.

Ahmed & Partners can take possible defences as under:

1.  There was no breach of the duty of care as the audit was done in accordance with professional standards: As the Auditor is not a blood hound but only a watch dog and follows only the professional standards of auditing and take due care before giving an opinion.

2. The loss was caused by an economic downturn and not as a result of the issued opinion: If the loss was due to economic downturn of the market, auditor's opinion can do nothing in this regard.

3.  The work performed was done to the level of the reasonable auditor: Auditing is an independent examination of Financial Information of an entity whether profit making or not irrespective of its legal structure whrere an opinion on the financial statements is given.

Auditor is not a blood hound but just a watch dog and as per the definition itself, it can be seen that Auditor can give only reasonable assurance and not an absolute assurance.

Follwing defences can not be taken by Ahemd & Partners :

1. Ahmad & Partners did not owe Xing Investments a duty of care as it was not a known user : This is because Financial statements are made for a general user.

Every user relies on the Audited Financial statements of an organisation.

2. The investors did not rely on the financial statements to make their investment decision: Investor made the investments in Chan corporation and in case if the Investor had not relied on the Financial Statements to make their Investment then their is no situation to sue the Auditors.