Question

B&Y Partners (BY) is an audit firm located in Hamilton Ontario. Last year it audited DFI Inca publicly traded company. Although the company has been profitable for many years, B&Y was hired by major creditor who was considering extending a large loan to DFI. DFI has a December 31, 2018 year end.

B&Y conducted the audit and gave an unmodified opinion, dated February 1, 2019.

A group of former employees purchased $750,000 of the common stock of DFI in 2017, intending to hold the stock as a long-term investment. Unfortunately, DFI went bankrupt in 2019 .DFI had a large customer that also purchased goods from DFI throughout all of 2018.

a. Explain, with reason, the parties the auditor owes a duty of care to if any.

b. Identify 4 reasons how auditors can limit their liability in performing an audit of financial statements?

Answer 1

Part A

The basic objective of the auditor of the company is to form an independent opinion on the financial statement whether the same is free from material misstatement due to fraud or error. In order to perform the audit the auditor must maintain professional skeptism. If the auditor maintain due care while performing the audit of the company then in no case the auditor is responsible for providing wrong reports.

Part B

Some of the ways by which the auditor can limit the liability are as under:

1. Auditor should tailor made the audit procedure i.e. for each client auditor should modify the procedures as per the requirement of the assignment.

2. Auditor should maintain high degree of professional skepticism to identify the material weakness.

3. The leader of the assignment should not delegate the quality related responsibility to junior level staff   

4. The job is assigned to the junior staff as per the capability of the person and the work done by the junior staff must be checked properly.

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