Disclaimer of Opinion. Ahmad Ali, Technicien Superior, was the auditor for Rebab Ramal Company, a medium-sized wholesaler based in Beriut, Lebanon. Rebab Ramal leased warehouse facilities and sought financing for leasehold improvements to these facilities. Rebab Ramal assured its bank that the leasehold improvements would result in a more efficient and profitable operation. Based on these assurances, the bank granted Rebab Ramal a line of credit.

The loan agreement required annual audited financial statements. Rebab Ramal submitted its 20X1 audited financial statements to the bank which showed an operating profit of

£187,500,000, leasehold improvements of Lebanese Pounds (£) £625,000,000, and net worth of £875,000,000. Relying on these statements, the bank loaned Rebab Ramal

£500,000,000. The audit report that accompanied the financial statements disclaimed an opinion because the cost of the leasehold improvements could not be determined from the company’s records. The part of the audit report dealing with leasehold improvements reads as follows:

Additions to fixed assets in 20X1 were found to include principally warehouse improvements.

Practically all of this work was done by company employees and the cost of materials and overheads were paid by Rebab Ramal.

Unfortunately, fully complete detailed cost records were not kept of these leasehold improvements and no exact determination could be made as to the actual cost of said improvements. The total amount capitalized is set forth in note 4.

In late 20X2 Rebab Ramal went out of business, at which time it was learned that the claimed leasehold improvements were totally fictitious. The labour expenses charged as leasehold improvements proved to be operating expenses. No item of building material cost had been recorded. No independent investigation of the existence of the leasehold improvements was made by the auditors.

If the £625,000,000 in leasehold improvements had not been capitalized, the income statement would have reflected a substantial loss from operations and the net worth would have been correspondingly decreased.

The bank has sustained a loss on its loan to Rebab Ramal of £500,000,000 and now seeks to recover damages from Ali’s Technicien Superior firm, alleging that the accountants negligently audited the financial statements.

Required
Answer the following, setting forth reasons for any conclusions stated.
A. Write the 20X1 disclaimed opinion audit report for Rebab Ramal.
B. Will the disclaimer of opinion absolve Ali’s Technicien Superior firm from liability?
Discuss.