AC$3093$ Auditing and Assurance $($Part$-$time$)$

Chapter $8$: Responsibility and Legal Liability

Past Paper Questions

$[2019$ Zone A Q$1]$

Fresh PLC is a company specialising in the production of dairy products. The company has been listed on the UK stock exchange for the past six years and during that time has experienced significant growth and success. The company has been audited since its listing by audit firm Gilks LLP who have always issued unqualified audit reports. The latest audit report in respect of the year ended ${31}^{st}$ December $2018$ was signed on ${19}^{th}$ March $2019.$

On $9^{th}$ April $2019$ the board of Fresh PLC issued a profit warning following suggestions of accounting irregularities in previous years' financial statements. This warning caused an immediate drop in the company's share price. A week later it was announced that the board had suspended the Finance Director $($FD$)$ and had accused him of fraud. It was said that he had overstated revenue by raising fictitious invoices for sales made to Boulangerie Victor, a 'shell' company that he controlled and which had no assets of any kind. He had allegedly overstated accounts receivable by including the debt owed by Boulangerie Victor. The former FD had also caused the inventory figure to be grossly overstated by the double$-$counting of some quantities and the inclusion of other items at selling price in excess of cost$.$ Furthermore, a loan from a bank which had provided funds to Fresh PLC had been concealed and omitted from the financial statements. Finally, it was claimed that the FD had used company assets for his personal benefit such as using a company jet for his family holiday and arranging for the company to buy office decorations from his personal collection of antique vases, the purchases being made at grossly inflated prices.

The media spotlight focused on Gilks LLP and it was asked 'how was it possible that unqualified audit reports had been issued and the fraud not uncovered through the audit process?$\text{'}.$ Both the shareholders of Fresh PLC and its creditors including the bank whose loan was omitted from the financial statements are considering a case of negligence against the auditors.

Required:

a$)$ Discuss to what extent the shareholders and the creditors have a case against the auditors for negligence. $($You should consider arguments against and in support of the auditors.$)$

$(15$ marks$)$

b$)$ Explain the responsibilities of auditors in relation to the detection of fraud in according to ISA$240.$

$(10$ marks$)1$