The audit of Binkle Ltd for the year ended 31 December 2X10 was completed on 2 February 2X11. Materiality was judged to be £150 000. As all tests yielded satisfactory results, the auditors, Tickitt & Run, issued a clean opinion. In accordance with the quality control procedures operating in the firm, a partner reviewed the file in March 2X11 and concluded that the audit complied with all auditing standards and that sufficient, appropriate and reliable audit evidence was on file to support the opinion issued.

On 14 May 2X11 the firm received an email from Nicholas Tasker, the Managing Director of Binkle Ltd, informing them that he had just received a postcard from the company’s Financial Controller showing a nice picture of the beach in Burovia where he had absconded with the Marketing Assistant and £2.4m of the company’s cash.

Preliminary investigations carried out by the Managing Director indicated that the sum had been misappropriated over a period of five years. The Managing Director concluded his email by asking, rather pointedly, how was it possible for Tickitt & Run to miss such a large fraud for such a long period of time and how they could justify the clean audit opinion issued a few months previously? He hinted darkly at possible legal action.

Required:

Prepare a draft memorandum addressing the concerns of the Managing Director of Binkle Ltd with specific reference to:

(a) the respective responsibilities of the auditor and the directors with regard to the company’s financial statements, and

(b) the auditor’s responsibilities in relation to fraud.