You have been the auditor of SHF Ltd for several years. The auditor's report for the year
Question:
You have been the auditor of SHF Ltd for several years. The auditor's report for the year ended 30 June 2015 was unqualified. In August 2016, SHF obtained a large loan from a finance company, LRB Ltd, to provide additional working capital. The company experienced severe trading problems and was placed in receivership in May 2017.
LRB is taking action against your firm based on the audit of the 30 June 2015 accounts. It claims that the cause of SHF's failure related to both the inadequate allowance for doubtful debts and a fall in the value of inventories on hand, and that these problems were apparent earlier than June 2015, but had not been adequately dealt with in the financial statements. LRB also claims that it would not have given the loan to SHF had those accounts been qualified.
Required
a. Outline your defence against the action taken by LRB. Provide specific case references to support your answer.
b. Explain whether you would change your answer to part (a) if LRB had written to your firm telling you that it intended to make a loan to SHF and was relying on the audited financial statements to assist it in making its decision.
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